Russia faces the fallout on Friday from the state's seizure of shares in oil giant YUKOS and the resignation of a presidential chief of staff widely seen as a key counterbalance to Kremlin hard-liners.

Russian stocks and the rouble were expected to extend losses after prosecutors froze a controlling stake in YUKOS belonging to its jailed boss Mikhail Khodorkovsky and his allies, many traders and analysts said.

After markets closed on Thursday, the government announced President Vladimir Putin had replaced chief of staff Alexander Voloshin, seen as leader of a pro-business faction in the Kremlin that rose under Putin's predecessor Boris Yeltsin.

But investors may take heart from the appointment of new chief of staff Dmitry Medvedev, who is seen as a moderate, pro-business figure.

Business leaders had worried Voloshin would be replaced by one of the Kremlin hawks -- many former security service officers appointed by Putin -- who analysts say are behind a campaign to reassert the state's authority over business and better control coming elections.

Like Putin, Medvedev comes from St Petersburg, but has no security service background and has business experience as chairman of gas giant Gazprom.

PUTIN TRIES TO ALLAY FEARS

Putin tried to allay fears the Kremlin was becoming hostile to business when he met investment bankers on Thursday and assured them he was committed to a market economy.

The scale of the drama, unprecedented since Russia's switch to capitalism from communism nearly 12 years ago, sent financial markets skidding and aroused fears investors would pull money out of the country -- just three weeks after credit rating agency Moody's granted Russia investment grade.

Since early July, YUKOS has been the target of legal action seen by most analysts as a Kremlin campaign to curb the political ambitions of Khodorkovsky, 40, who is believed to have his long-term sights on the presidency.

On Thursday, the benchmark RTS index closed down 8.14 percent, YUKOS plummeted almost 12 percent and the rouble slid about 10 kopecks against the dollar.

"The rouble may go lower, but many people think the central bank...will come out to calm the market," said Artyom Roshin at Aljba Alliance bank.

"The market was very much overheated over the last month. We were looking at it as being fundamentally overvalued by about 10-15 percent. So, there is a lot of hot air in the market. Maybe we will have another 15 percent downfall, but it will be dependent on the newsflow."

The seizure of YUKOS shares stops Khodorkovsky, Russia's richest man, and his allies from cashing in or transferring their controlling stake in the country's biggest oil company.

It also puts a hold on talks with Exxon Mobil Corp which has been discussing taking a big stake in YUKOS, analysts say.

"I think the bigger question is what happens to this block of shares. Is it brought back to the state to be managed by the state, is it returned to its owners or is it sold to a foreign entity?" said James Fenkner, head of research at Troika Dialog brokerage.

On Saturday, Khodorkovsky was arrested at gunpoint, thrown into a Moscow jail and charged with tax evasion and fraud.

Khodorkovsky, one of the "oligarchs" who made their fortunes in the post-Soviet sell-off of state assets, openly supports liberal opponents of Putin in parliamentary elections due in December. Putin is seeking re-election in a separate poll next March.

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