UK's Brown reshuffles government to calm crisis



By Frank Prenesti and Adrian Croft

LONDON (Reuters) - British Prime Minister Gordon Brown averted the immediate danger of government collapse on Friday with a cabinet reshuffle that secured the loyalty of key ministers, but the political uncertainty weighed on sterling.

By backing down from replacing finance minister Alistair Darling, Brown appeared to have headed off an open revolt by his Labour party for now. But his authority has been wounded at a time when Britain is in its deepest recession in 60 years and markets and the country are looking for strong government.

The pound hit a two-week low against the euro before recovering most of its ground.

"The market is waking up to what a mess politics are in the UK," RBC currency strategist Adam Cole said.

Three more senior ministers quit the government on Friday, bringing to total to six in the past four days.

However, alongside Darling, Foreign Secretary David Miliband and heavyweight Business Secretary Peter Mandelson stayed in their posts, shoring up the prime minister's position.

"I will not waver, I will not walk away, I will get on with the job and I will finish the work," Brown told a news conference after details of the reshuffle were announced.

There was some relief for investors from news that Darling was to remain in his job, offering continuity in the most important portfolio for markets. Bond prices were unaffected and the main stock index was up 1.2 percent.

Brown appeared to give up on a plan to replace Darling with his close ally Ed Balls. Darling has won praise for his efforts to pull Britain out of recession.

Alan Johnson, who Brown moved from the health ministry to the more powerful interior ministry, has been seen as the front-runner to replace Brown. His appointment appeared to ensure the loyalty of the man most likely to challenge him.

However, Brown still faces a nascent revolt among Labour members of parliament (MPs), some of whom have been gathering signatures to unseat him. A change of leader would raise the prospect of a snap election in the autumn rather than the widely expected date of May 2010.

The limited personnel moves mean few abrupt changes in policy are likely, while the fact key ministries remained unchanged appeared to show Brown had given up ground and reappointed some ministers in order to secure their loyalty.

MORE DEPARTURES

Still, six ministers quit the government in total, with Defense Secretary John Hutton, Welsh Secretary Paul Murphy and Transport Secretary Geoff Hoon becoming the latest to go.

They followed Work and Pensions Secretary James Purnell, also seen by some as a potential leader of the party, who resigned late on Thursday and called on Brown to step aside.
Hutton said he was still committed to supporting Brown and would give up his seat at the next election, but Purnell made his aim abundantly clear -- to oust Brown.

"I now believe your continued leadership makes a Conservative victory more, not less likely," he told Brown in a letter published in newspapers. "I am therefore calling on you to stand aside to give our party a fighting chance of winning."

Friday's cabinet reshuffle, the second in eight months, may be Brown's last chance to rally his party around him.

It should buy the prime minister some time, but the pressure remains on. Brown's departure after only two years would add to calls for Labour to bring forward a general election that does not have to be held until June 2010.

The opposition center-right Conservatives are well ahead in the polls and would be the clear favorites to return to power for the first time since 1997.

Whoever wins would have to reduce borrowing from a level of 175 billion pounds ($282 billion) this year -- more than 12 percent of GDP -- and will have to raise taxes and cut spending.

Projections based on results from local elections in England indicated that the Conservatives would have taken a 38 percent share of a national vote, against 28 percent for the smaller opposition Liberal Democrats and 23 percent for Labour.

That would have given the Conservatives a smaller majority than indicated in recent opinion polls.

Sterling was down 1.1 percent against the dollar at $1.6006, according to Reuters data, after hitting a one-week low of $1.6000.

The euro was down 0.1 percent at 87.57 pence, after rising to 88.67 pence, its highest since late May.