The purge of Bo Xilai and arrest of his wife for suspected murder have rocked China, and how leaders deal with the case may prove to be a crucial test for the country's political system, analysts say.

The state Xinhua news agency said Tuesday that Bo -- once tipped to access the top echelons of power -- had been suspended from the powerful Politburo and his wife Gu Kailai was being investigated over the death of Briton Neil Heywood.

News of Bo's demise came just one month after the former commerce minister was sacked as Communist Party chief of the southwestern megacity of Chongqing, and has exposed major rifts within the party ahead of a key leadership change.

"It's a dramatic event. We normally don't get this kind of drama out of the Chinese leadership," said Patrick Chovanec, professor at Beijing's Tsinghua University.

"It's not just about corruption, it's a major leadership battle over who is going to lead the country."

Bo, the son of revolutionary hero Bo Yibo, was part of the party's exclusive, 25-member Politburo and was a member of the so-called "princeling" faction that analysts say rivals President Hu Jintao's "Youth League" group.

Observers say Bo's fall from grace is a victory for Hu and Premier Wen Jiabao, who favour economic and social reforms in China, but it has also shattered the appearance of unity the party cultivates.

Daniel Lynch, an expert in Chinese political elites at the University of Southern California, said the ultimate outcome would depend on how the leadership dealt with the Bo and Gu cases.

"If it turns out... that Bo and Gu are genuinely guilty of heinous crimes, the Party can strengthen the political system by suggesting their dismissal from office and possible prosecution prove that no one in China, however powerful, is above the law," he said.

"If, on the other hand, the case seems weak, or many people aren't convinced and decide that Bo and Gu are being targeted unfairly in a factional political struggle, then the political system will be damaged."

Jean-Pierre Cabestan, a politics professor at the Hong Kong Baptist University, said the Bo affair raised questions about the future of China's political system and the way it is organised.

"Clearly, the level of impunity enjoyed by high officials, especially if they belong to princeling families, is not acceptable and sustainable anymore," he said.

He added that the murder element to the case may also have precipitated events.

"The British had officially asked that the case of the British businessman be reopened, this forced the leadership to look at the case more closely," he said.

Bo had once been tipped to become a member of the party's Standing Committee -- the apex of political power in China -- when seven of its nine members step down in the autumn in a once-in-a-decade leadership transition.

But his ambitions began to take a hit when his former police chief Wang Lijun fled to a US consulate in February, reportedly seeking asylum while handing over evidence of Bo's alleged wrong doings.

Several weeks later, Bo was sacked as Chongqing head -- a move that sparked wild online speculation about the current state of the party and rumours of military coups despite China's strict censorship controls.

"The reason the dismissal and probe were announced so quickly is probably because in today's China, they couldn't possibly keep such things a secret for the many months" until the leadership transition, said Lynch.

"Rumours would swirl, and the rumours themselves could fuel a sense of instability."

Chovanec said that the last major political scandal in China in 2006, during which Shanghai's party chief and Politburo member Chen Liangyu was detained for corruption, played out very differently.

"That was a big shake-up but it was a fairly contained process. There was an announcement -- this is what happened -- and that was it," he said.

"But you didn't have this swirl of rumours about coups, who might be next... And you didn't have public participation."

Regardless, the announcement almost certainly closes the door on the political career of Bo -- known for his suave and open demeanour which was seen as refreshing in a country where leaders are often rigid in public.