Markets plummeted on opening as investors reacted to the crisis, as well as turmoil around US President Donald Trump, with fears that Temer's centre-right government will be hamstrung in its attempt to push through austerity reforms.
Demands for Temer's impeachment and new elections sprang up from opposition lawmakers, while small crowds appeared in Sao Paulo and Brasilia overnight shouting: "Temer out."
In another blow for the veteran leader of the PMDB party, the prosecutor general asked for authority to arrest his key ally Senator Aecio Neves from the PSDB party on bribery charges.
The Supreme Court suspended Neves and was to decide later on his arrest. Officers could be seen entering Neves' property in Rio de Janeiro and his sister Andrea was arrested in Belo Horizonte.
The crisis leaves Temer, 76, facing two immediate problems.
The first is his own political survival, and the second is the survival of the reforms which he says are needed to whip Brazil's floundering economy back into shape after two years of recession.
Temer's office announced that he was cancelling his previously scheduled back-to-back meetings with party leaders. Brazilian media reported that he could make a public statement.
Temer, who took over after the impeachment last year of Dilma Rousseff, was reported late Wednesday by O Globo newspaper to have been secretly recorded agreeing to payments of hush money to Eduardo Cunha, the disgraced former speaker of the lower house of Congress.
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