UPDATE 2-Medtronic looks outside for heart division chief

* Medtronic to divide into two operating units

* External search underway for heart device group chief

* Shares down 1 pct (Adds analyst comment, updates shares)

NEW YORK, Aug 31 (Reuters) - Medtronic Inc (MDT.N) said on Monday it is conducting an external search for a president to oversee its heart device businesses as part of organizational changes that will divide the company into two operating units.

Medtronic said Chris O'Connell, head of its diabetes business, has been promoted to the new position of executive vice president and group president for the Spinal and Biologics, Neuromodulation, Diabetes, and Surgical Technologies Group.

But it is looking outside the company for a new head for the group that includes its most important products, such as devices to control heart rhythm and drug-coated stents.

That group combines Medtronic's Cardiac Rhythm Disease Management (CRDM), CardioVascular and Physio-Control businesses.

The current presidents of those three businesses, who appear to have been passed over for the group's new top spot, will report to the new executive vice president and group president, Medtronic said.

"Outside perspective has worked for Medtronic in the past and is probably welcomed by many investors," Morgan Stanley analyst David Lewis said in a research note. "This said, the decision to not promote Pat Mackin or Scott Ward will likely come as a surprise to some investors."

Mackin is president of the CRDM business and Ward heads up the CardioVascular unit.

Lewis also said the Physio-Control business, which makes automated external defibrillators, remains a likely divestiture target.

The Minneapolis-based company also named Rick Kuntz as its chief scientific, clinical and regulatory officer. Kuntz had been president of the neuromodulation business, which is now part of the group to be run by O'Connell.

Medtronic shares ended down 1 percent at $38.30 at the close of regular trading Monday on the New York Stock Exchange. (Reporting by Bill Berkrot, editing by Gerald E. McCormick and Tim Dobbyn)