The prospect of more City Council indictments related to the misuse of public funds and the council’s practice of stashing budget money behind fake organizations is threatening to tarnish the legislative body and hamper council members running for citywide office in 2009.

The initial disclosure that the council routinely inserted fictitious groups into the city’s budget to create a slush fund the council speaker could use for political rewards or to fund favored groups cast a pall on the mayoral ambitions of the council’s speaker, Christine Quinn, but did not appear directly to harm other council members.

A federal indictment unsealed on Wednesday is changing that, alleging that two council aides stole money from a city-funded organization and diverted it to friends in the country of Jamaica and to the re-election campaign of their boss, Council Member Kendall Stewart, and widening the criticism of the council.

“There is concern that the council has been undermined and that the leadership and direction is very weak,” a council member who is considered a likely candidate for comptroller or public advocate in 2009, John Liu, said yesterday. “I think we all understand that this is just the beginning.”

The city’s Department of Investigation issued a public call to whistle-blowers yesterday, asking that anyone with information about the embezzlement of funds allocated by the City Council come forward. The U.S. attorney in Manhattan, Michael Garcia, said on Wednesday that an investigation into the council’s financing of local organizations would continue. “We’ll see where it leads,” he said. A political consultant, Scott Levenson, said members of the council with whom he spoke last week, after the existence of fake groups in the city’s budget was first disclosed, were “deeply concerned about how these malfeasances reflect on them as members.” He said the public’s mistrust of politics in general would open the door to self-funded political outsiders eyeing open seats in 2009.

A political science professor at Baruch College, Douglas Muzzio, said that if the two indictments and news of the council’s budget practices are all that come out of the federal and local investigations, then “the damage can be contained.”

“Now clearly, if the U.S. attorney, for example, has other council members or council staff in their sights, then it begins to accumulate. Then the body itself becomes the issue, more so than individual members,” he said.

Mayor Bloomberg yesterday defended the city’s role in the alleged embezzlement of funds. According to the indictment, the city gave $356,000 to the Donna Reid Memorial Education Fund, the organization that council aides allegedly stole money from.

The organization was turned down by a city agency when it applied for funding in 2004 because the agency found the fund’s address was the same as the council staffer who was soliciting the money, the indictment states. The agency alerted the Department of Investigation about the organization, the mayor said, but the group subsequently applied for funding from another agency and got it.

Mr. Bloomberg said the Department of Investigation “started to monitor what happened once that grant was made and then, when they found the people who got the grant were starting to rip off the foundation, then they brought in the feds or the district attorney.” He said the department “did exactly what you’d want them to do.”