* Banco Espirito Santo CEO steps down
* Proposed replacement seen as close to him
* Founding family no longer majority owner after recent capital hike (Adds formal resignation, proposed board chief, analyst on share price)
By Laura Noonan, Sergio Goncalves and Andrei Khalip
LISBON, June 20 The founding family of Banco Espirito Santo has accepted their patriarch Ricardo Espirito Santo Salgado must step down as chief executive of Portugal's largest listed bank, proposing the chief financial officer as his successor.
BES said in a statement that ESFG, the company that holds the family's 25.05 percent stake, would put forward Amilcar Morais Pires, 53, as 70-year old Salgado's replacement at a shareholders' meeting on July 31.
ESFG said Salgado had submitted his resignation from the executive committee along with other family members, including his cousin Jose Maria Espirito Santo Silva Ricciardi who had previously tried to unseat Salgado via a confidence motion.
Earlier, three sources familiar with the matter had said the Bank of Portugal had pushed for Salgado's resignation following the discovery of financial irregularities at a holding company that owns a stake in BES. The central bank was also concerned with the power struggle within the family, local media said.
Salgado has said he and the bank knew nothing about any irregularities at the holding.
The Bank of Portugal said only that it would now await the bank's new internal governance model for evaluation after its approval by BES shareholders.
The proposed new CEO is seen as a person close to Salgado, who will also chair a new consultative committee at the bank.
A source familiar with the matter said BES's entire board would step down imminently and shareholders would be asked to approve a new board, chief executive and chief financial officer at the July meeting.
BES said on Friday ESFG would also propose that family members be represented on a consultative committee that would also be open to other BES shareholders. The second-largest is French bank Credit Agricole.
Portugal's market watchdog CMVM, which had suspended the bank's shares on Friday morning amid reports of Salgado's departure, re-opened trading in the shares at 1330 GMT. They fell to close 3.7 percent at 0.879 euros, adding to Thursday's 2.7 percent fall.
NOT TOTAL RUPTURE
Albino Oliveira, an analyst at Fincor brokers, said the proposed changes were less aggressive than some in the market had feared and did not rule out a recovery in the share price after the recent hammering.
"Considering that Salgado stays (on the committee), the decision is neither continuity nor total rupture. The market will wait to see what ideas the new CEO will bring," Oliveira said.
The bank's governance has been under intense scrutiny since central bank regulators discovered that retail clients of BES had been sold bonds that were used to fund the activities of a company related to the Espirito Santo family.
Portugal's' only banking dynasty, which began with a money-changing business in 1869, lost control of the bank after a 1.1 billion-euro ($1.4 billion) share sale last week but is still its largest shareholder.
Under measures agreed with the central bank, which is responsible for vetting banks' leadership, the family will have no representation on the new board, the source said.
A source familiar with the process said that the new BES directors would be a mixture of international and local professionals without any conflicts of interest.
ESFG also proposed to appoint Paulo Cardoso Pinto, a parliament deputy for the ruling Social Democratic party and former Constitutional Court judge as chairman of the board.
The Espirito Santo family still controls many other assets in the country through a complex array of holding companies, and family members sit on several Portuguese company boards.
This month's capital increase, presided over by Pires, drew strong investor demand even though the sale prospectus, issued in May, spoke of "material irregularities" involving Espirito Santo International (ESI), a Luxembourg-based holding company through which the family holds part of its stake in the bank.
The prospectus said the irregularities affected the "completeness and trustworthiness" of ESI's accounts.
BES has said it is insulated against the problems at ESI, and when Bank of Portugal discovered that bonds linked to a family company had been sold to the bank's clients it pushed the bank to quickly redeem the bonds. ($1 = 0.7336 euros) (Writing by Andrei Khalip; Editing by Robin Pomeroy)