NEW DELHI (Reuters) - A key party in India's ruling coalition said on Saturday it was withdrawing from the Congress-led government, dealing a blow to Prime Minister Manmohan Singh as he battles a series of corruption scandals. The DMK, whose 18 seats gave the coalition a slender majority, said it would support the government on an issue-by-issue basis The Congress-led government must now gain support from the Dravinda Munnetra Kazhagam (DMK) on key bills and, or try to bring in other regional parties into its coalition. The first test will come with the 2011-2012 federal budget which was introduced in parliament last week and which must be passed in the current session. The government would fall if it loses the vote. The latest crisis will likely hurt markets when they open as investors fret over the stability of the coalition. "This development could indicate start of some turbulence in governance. So, in addition to the fundamentals like oil prices, markets may react negatively on Monday. Bond yields could harden," said Ashish Vaidya, head of trading at UBS Mumbai. The DMK said it had withdrawn over a dispute over seats to be contested in local elections in the DMK's Tamil Nadu state, although many analysts see its withdrawal as linked to a massive telecoms scandal that has implicated the party. A source at the prime minister's office said there was no crisis facing the government. "I don't think we have received any resignation letters so far. There is no crisis at all," the source said. The withdrawal of the six DMK ministers would make it harder for the government to pass reform bills. A series of corruption scandals have already undermined confidence in the ability of Singh to lead Asia's third largest economy. Regulatory concerns, combined with the global economic slowdown have hit foreign direct investment in India and contributed to making the Mumbai stock exchange the worst performing of the world's major share markets. "The DMK has decided to withdraw from the government because the Congress does not seem interested to continue the alliance for the coming state assembly elections," a statement from the party said. The DMK is at the centre of a $39 billion telecoms licensing scandal in which telecoms minister A. Raja, a DMK member, faces possible charges. The scandal in which telecoms concessions were granted at rock bottom prices has widened out to include a probe into a TV channel linked to the DMK. "The DMK's move to break the alliance is not about seat sharing. It is about the investigation into the 2G scandal," said political commentator Cho Ramaswamy referring to the sale of 2G mobile licenses. Prime Minister Singh has seen his reputation dashed by the scandal which has bolstered the main opposition Bharatiya Janata Party which has seized on the scandal. Singh last week saw the Supreme Court reject his appointment of a tainted civil servant as the head of the country's main anti-graft agency.