UPDATE 2-Russian rouble pares losses in volatile market after government resigns

* Rouble dives after govt resigns but quickly pares losses

* Stock indexes mirror moves in rouble

* Analysts say key question is who will be new PM (Adds detail, analyst comments, updates prices)

MOSCOW, Jan 15 (Reuters) - Russian markets were taken by surprise by the resignation of Prime Minister Dmitry Medvedev’s government on Wednesday, with the rouble and stock markets suffering sharp losses before rebounding to make gains amid the uncertainty.

Medvedev said the resignation was to give President Vladimir Putin room to carry out proposed constitutional changes.

“In a nutshell, we take this announcement as an attempt by Putin to shake up Russia’s polity and refocus the administration on implementing the president’s well-telegraphed but slowly progressing public spending programme,” Citi said in a note.

The rouble dropped to 61.81 versus the dollar following the news about the government but soon regained ground and firmed to 61.41, up 0.1% on the day by 1452 GMT.

Former economy ministry official Kirill Tremasov, now the head of the Locko-Invest investment firm, said the temporary market fluctuation was a normal reaction to increasing uncertainty.

“We believe there will likely be no fundamental changes in economic policy brought about by the change in the cabinet, so we consider the market movement an excellent buy opportunity,” he said.

Political news in Russia dominated the market agenda on Wednesday after Putin, in an annual address to lawmakers and the country’s ruling elite, proposed changes to Russia’s constitution and pledged financial aid to Russian households.

The market remained jittery as a political reshuffle began, with the main question being who will replace Medvedev as the head of the government.

The position of prime minister will become more powerful when the proposed changes go through, said Charlie Robertson, chief economist at Renaissance Capital in London.

“It will be interesting to see who Putin puts in there,” he said in a note to clients.

Versus the euro, the rouble briefly dipped to 68.86 but soon pared losses to trade at 68.49.

The Russian stock market also rode a wave of increased volatility. The dollar-denominated RTS index fell following the resignation reports, to be 1% down on the day, but managed to climb higher to 1,611.0, up 0.4%.

The rouble-based MOEX Russian index was up 0.4% at 3,143.4 points after falling as low as 3,106.41.

For Russian equities guide see

For Russian treasury bonds see (Additional reporting by Elena Fabrichnaya; Editing by Pravin Char)