By Andrew Osborn and Vladimir Soldatkin

MOSCOW (Reuters) – Russia’s government unexpectedly resigned on Wednesday after President Vladimir Putin proposed sweeping constitutional changes that could allow him to extend his rule.

Prime Minister Dmitry Medvedev said he was stepping down to give Putin room to carry out the changes, which, if implemented, would shift power to parliament and the prime minister – and might thus allow Putin, 67, to rule on in another capacity after his current term ends in 2024.

Medvedev, a long-time Putin ally and former president, announced his resignation on state TV sitting next to Putin, who thanked him for his work.

Putin said Medvedev would take on a new job as deputy head of Russia’s Security Council, which Putin chairs.

Attention now turns to who becomes the next prime minister. The array of possible candidates includes Moscow Mayor Sergei Sobyanin, who is credited with breathing new life into the capital.

Wednesday’s changes will be seen by many as the start of Putin’s preparations for his own political future when he leaves the presidency in 2024.

Whoever he picks as prime minister will inevitably be viewed as a possible presidential successor – echoing the way that Putin stepped down from the presidency in 2008 to become prime minister under Medvedev, who then stepped aside four years later to allow Putin to resume the presidency.

In power in one of the two roles since 1999, Putin is due to step down in 2024, when his fourth presidential term ends.

He has not yet said what he plans to do when his term expires but, under the current constitution, which sets a maximum of two successive terms, Putin is barred from immediately running again.

‘SERIOUS CHANGES’

Putin told Russia’s political elite in his annual state-of-the-nation speech that he favored changing the constitution to hand the State Duma, the lower house of parliament, the power to choose the prime minister and other key positions.

“These are very serious changes to the political system,” Putin said.

“It would increase the role and significance of the country’s parliament … of parliamentary parties, and the independence and responsibility of the prime minister.”

Critics have long accused him of plotting to stay on in some capacity to wield power over the world’s largest nation after he steps down. He remains popular with many Russians who see him as a welcome source of stability even as others complain that he has been in power for too long.

Medvedev’s resignation took Russian markets taken by surprise. The rouble and stocks suffered sharp losses before rebounding to make gains amid the uncertainty.

“In a nutshell, we take this announcement as an attempt by Putin to shake up Russia’s polity and refocus the administration on implementing the president’s well-telegraphed but slowly progressing public spending program,” Citi said in a note.

The rouble dropped to 61.81 to the dollar after the news reports about the government but soon regained ground and firmed to 61.41 , up 0.1% on the day by 1452 GMT.

Against the euro, the rouble briefly dropped to 68.86  but soon pared losses to trade at 68.49.

The dollar-denominated RTS share index <.IRTS> fell 1% on the day minutes after the resignation reports, but rebounded to stand 0.4% higher.

The rouble-based MOEX Russian share index  was also up 0.4%.

(Reporting by Maria Kiselyova, Tom Balmforth, Vladimir Soldatkin, Maria Tsvetkova and Andrey Kuzmin; editing by Mike Collett-White and Kevin Liffey)