UPDATE 3-Reed CEO Smith quits after 8 months in the job

* Smith resigned by mutual agreement, effective immediately

* New CEO Engstrom has been Elsevier CEO since 2004

* Smith divided opinion with rights issue, investment plan

* 2010 operating margin seen lower

* Shares down 6 percent

(Adds background, analyst comment, updates shares)

By Georgina Prodhan and Kate Holton

LONDON, Nov 11 (Reuters) - Reed Elsevier's (REL.L) (ELSN.AS) chief executive, Ian Smith, has resigned because he was wrong for the times, the publisher said on Wednesday, replacing the industry outsider with a proven company insider, Erik Engstrom.

Smith, just eight months in the job and known for transforming companies, will be replaced immediately by the head of Elsevier, the company's scientific-publishing division.

Reed Elsevier also said 2010 operating margins would likely fall slightly, due to a weak revenue environment combined with increased investment, particularly in U.S. legal markets.

Its shares were down about 6 percent in a 1 percent lower European media sector .SXMP, as investors worried that the company may have lost its way after being seen as a safe bet for a decade when led by Crispin Davis, Smith's predecesor.

"Ian and the board decided it wasn't the right role for him in the current economic circumstances. Erik has proven sectoral experience. There is no disagreement on strategy," a spokesman for the Anglo-Dutch company said.

Smith, 55, who divided investor opinion with an August rights issue and ambitious investment plans, was not available for comment.

Dutch brokerage Petercam cut its recommendation to 'hold' from 'buy' on the margin forecast, although other analysts said they were unsurprised by the guidance.

"The new CEO will likely have solid backing but first will have to calm the unrest and prepare the company for renewed growth after 2010," Petercam said in a note.