By Satarupa Bhattacharjya and Rajesh Kumar Singh
NEW DELHI (Reuters) - India's ruling Congress party named Finance Minister Pranab Mukherjee as its nominee for president on Friday, capping a week of political turmoil that exposed the fragility of a coalition government that has lurched between crises as the economy sputters.
The political machinations over who should fill the largely ceremonial post of president have proven a major distraction for the government at a time when investors and business leaders have been demanding that it take prompt action on the economy.
Congress, which has governed India for the most of the 65 years it has been independent, struggled to win support from key allies for its candidate. Analysts saw this as evidence of the weakness of India's grand old party in the face of increasingly powerful regional parties with their own agendas.
Mukherjee, 76, is expected to step down by June 24, and Prime Minister Manmohan Singh, 78, could take charge of his portfolio for the next several months, a source close to the finance minister told Reuters on condition of anonymity.
Singh's reputation as the architect of landmark economic reforms in 1991 that unleashed two decades of faster growth has been badly tarnished by widespread criticism of his leadership of Asia's third-largest economy. Critics say his government has failed to take concrete steps to rein in spending on subsidies and bring down stubbornly high inflation.
There is no obvious successor to Mukherjee, but analysts said filling the vacancy was less important than the government overcoming internal divisions that have led to policy flip-flops on major economic reforms and scared off investors.
"Whoever becomes the next finance minister will be key for the market. The person who takes charge will have to deal with the fiscal deficit, the slowing growth and the inflationary pressures," said Kumar Rachapudi, fixed income strategist at Barclays Capital in Singapore.
Several names have been floated in Indian media as possible successors, including Singh's influential and trusted advisers C. Rangarajan and Montek Singh Ahluwalia, Home Minister P. Chidambaram, Rural Development Minister Jairam Ramesh, and Trade Minister Anand Sharma.
Asked who would succeed him if he became president, Mukherjee told journalists: "The prime minister himself is an eminent economist. Under his stewardship we will overcome the temporary crisis."
But Congress has struggled to reach consensus within its own ranks and persuade often unpredictable coalition allies to support economic reforms that are widely seen as vital to India improving the lives of its 1.2 billion population.
Congress party leader Sonia Gandhi officially nominated Mukherjee at a meeting of the ruling coalition, though one key ally, West Bengal chief minister Mamata Banerjee who rejected Mukherjee's candidacy, did not attend the meeting.
Banerjee, who has proven an unpredictable ally, this week proposed that Singh's name be considered, an effective vote of no-confidence in the prime minister that raised the specter of the fragile UPA coalition government breaking apart.
But Congress appeared confident on Friday that it had the votes for the July 19 presidential election by federal and state legislators as several other major regional parties said they, too, would back Mukherjee.
"The UPA appeals to all political parties ... to support Pranab Mukherjee for the office of president," Gandhi said.
With the next general elections in 2014 widely expected to produce a fragmented parliament with no clear winner, Congress wants to make sure it controls the presidency. The new president will play a key role in deciding which party takes the lead in forming a government.
The announcement of Mukherjee's candidacy came on the eve of Singh's departure to Mexico where he will attend next week's meeting of the Group of 20 leading industrial nations that is expected to be dominated by the European debt crisis.
Singh's government has largely blamed India's economic troubles on the euro zone crisis, drawing fire from economists and business groups who say it is ignoring the political paralysis at home that has left policy-making adrift.
Standard & Poor's rating agency warned this week that India could become the first so-called Bric nation to be downgraded to junk status, citing in part its concerns about the division of power between Singh and Sonia Gandhi.
"Paramount political power rests with the leader of the Congress party, Sonia Gandhi, who holds no cabinet position, while the government is led by an unelected prime minister, Manmohan Singh, who lacks a political base of his own," it said.
(Writing by Ross Colvin, reporting by Rajesh Kumar Singh, Arup Roychoudhury, Satarupa Bhattacharjya, Manoj Kumar, in New Delhi, and Shamik Paul in Mumbai, Editing by Ed Lane)