* Head of junior coalition party resigned on Tuesday
* Replacement not keen to take his role as finance minister
* Shake-up could make income tax cuts more likely
By Michael Shields
VIENNA, Aug 27 The new leader of Austria's conservative party said on Wednesday he would prefer not serve as finance minister as well, a tricky dual role his predecessor performed before suddenly resigning both posts in a row over tax policy.
The government shake-up in the wealthy euro zone member comes as French President Francois Hollande revamps his his government after a similar political row over how to boost a flagging economy without deepening the budget deficit.
Austrian Economy Minister Reinhold Mitterlehner was picked on Tuesday night by the People's Party (OVP) to replace Michael Spindelegger to head the party - the junior partner in the government coalition - automatically becoming vice chancellor.
He has not ruled out taking on the finance portfolio but, in an interview with ORF radio, he said: "At the moment I am tending in the direction of separating the two functions".
As economy minister, Mitterlehner already handles broad areas such as energy, but macro-economic policies such as taxation are the domain of the finance minister.
He reiterated that the OVP - which governs in an uneasy coalition with centre-left Social Democrats - would name a new finance minister by early next week.
Spindelegger resigned on Tuesday, accusing party colleagues of disloyalty for questioning his refusal to cut income tax unless the government could do so without raising other levies, putting him at odds with the Social Democrats and members of his own party who favour stimulus over austerity.
Mitterlehner said his stance would not be very different.
"I can already signal that I see relatively little leeway for a change, that I would do this or that entirely differently," he told ORF, but added the coalition could not afford a permanent stalemate on the issue.
That apparent openness to negotiation may boost prospects for a deal on policies to boost a flagging economy, but that would require a tricky balancing act to accommodate fiscal hawks within the OVP.
Speculation about who might get the finance job at a time of a rising budget deficit and record state debt has increasingly focused on finding an outside technocrat, although Mitterlehner said he had talked to no one yet.
Gottfried Haber, a 41-year-old professor at Danube University in Krems, is named in many media as a potential pick. A specialist in economic policy and healthcare management, Haber often appears on television as a policy analyst.
Newspapers also cited Hans Joerg Schelling, deputy head of the powerful Chamber of Commerce, and Volksbanken AG Chief Executive Stefan Koren as potential ministers.
Whoever gets the portfolio faces a host of challenges.
The budget deficit is already projected to reach 2.7 percent of gross domestic product this year and debt nearly 80 percent of GDP thanks to the costs of winding down stricken nationalised lender Hypo Alpe Adria.
The government faces lawsuits from debt holders over its decision to wipe out 890 million euros ($1.17 billion) worth of subordinated debt guaranteed by Hypo's home province of Carinthia and to seize 800 million euros from former Hypo owner BayernLB to help finance the wind-down.
Vienna hopes to strike a deal with German state-controlled BayernLB to settle claims and counterclaims over money left at Hypo when it was nationalised in 2009.
Stress tests for six Austrian lenders are looming amid European Central Bank-led health checks of major euro zone banks, and partly nationalised Volksbanken may need more capital to handle the test's most adverse scenario.
Spindelegger had said taxpayers would not provide any more help to the bank, which has said it can manage on its own.
(1 US dollar = 0.7585 euro) (Editing by Robin Pomeroy)