UPDATE 2-Brazil Congress overturns Rousseff oil veto, Rio ups ante
* Rio de Janeiro government suspends payments in protest
* Main oil producing states appeal to Supreme Court
* Feds say Rio "bluffing," putting investment grade in peril
By Anthony Boadle
BRASILIA, March 7 (Reuters) - Brazil's Congress overturned a presidential veto on parts of an oil royalty bill on Thursday, setting up a prolonged legal battle with producer states and prompting oil-rich Rio de Janeiro to order a suspension of payments on the state's obligations in protest.
Rio's state government, which calculates a loss of 3.1 billion reais ($1.58 billion) this year because of the new legislation, ordered the suspension of all except legally mandated expenses like salaries to public employees and transfers to municipalities, until Brazil's Supreme Court can rule on the royalty dispute.
While originally aimed at giving non oil-producing states a fair share of Brazil's future oil wealth, the bill reduces royalties received from existing production contracts. That would take existing revenue streams from states and cities bordering maritime fields and redistribute them among all 27 states and 5,560 municipalities.
The override was a defeat for President Dilma Rousseff, who had committed herself to limiting the impact of her government's oil industry reform on producing states.
It was not immediately clear from the Rio de Janeiro order whether the suspension would include debt payments to the federal treasury or just suppliers and contractors. But economists and federal officials said the state has little leeway to apply pressure by halting payments because many of its expenses are considered obligatory by law. Continuación...