UPDATE 1-SMIC shares notch record gain on settlement, new CEO

* SMIC shares surge 68 pct to highest in more than a year

* Incoming CEO expected to improve prospects for SMIC

By Doug Young

HONG KONG, Nov 11 (Reuters) - Shares of SMIC (0981.HK)(SMI.N), China's largest contract chipmaker, posted record gains on Wednesday after the company settled a lawsuit and replaced its CEO -- moves that could pave the way for future growth.

Shares of Semiconductor Manufacturing International Corp soared as much as 68 percent in Hong Kong in Tuesday morning trade, their largest single-day gain since their 2004 initial public offering.

The stock was up about 60 percent at 0350 GMT at HK$0.60, its highest level in more than a year. But that level was a fraction of the HK$2.69 price its shares commanded for its initial public offering in March 2004.

Turnover of 1.7 billion shares was already 50 times its average volume over the past 30 days and represented almost 8 percent of its shares on issue.

The share surge came after SMIC, whose shares were suspended last week, said on Tuesday that it had settled a lawsuit against it by Taiwan-listed TSMC (2330.TW), the world's largest contract chipmaker, which could include TSMC taking a stake of up to 10 percent in SMIC. [ID:nHKG280185]

In addition, SMIC said its long-serving CEO, Richard Chang, had stepped down and was being replaced by another industry veteran, David Wang -- a move analysts said could pave the way for much needed consolidation in China's fragmented chip sector.

"TSMC now becomes one of the major shareholders in SMIC and the company might get more help, either on management or production from TSMC in the future," said Andrew Deng, assistant vice-president at Taiwan International Securities. "So, it is good news for SMIC."

SMIC has been plagued with difficulties in the highly competitive global contract chipmaking sector since its 2004 IPO, posting losses in 16 of the last 17 quarters.

Observers said the company -- which has strong support from the Chinese government -- lacked the economies of scale to compete with bigger rivals such as TSMC and UMC (2303.TW), the world's No.2 contract chipmaker.

The arrival of Wang as its new CEO, who has ties to other major Chinese chipmakers, along with the addition of TSMC as a potential strategic stakeholder, could help the company improve its situation. (Additional reporting by Baker Li in Taipei; Editing by Chris Lewis)