* Dos Santos won't run for president in August vote
* Will stay as party president, keeping sweeping powers
* Defence Min Lourenco named as MPLA presidency pick
* Lourenco, ex-soldier who likes karate, a dos Santos ally (Adds new leader quotes, public response)
By Herculano Coroado
LUANDA, Feb 3 (Reuters) - Angolan President Jose Eduardo dos Santos confirmed on Friday he will not run in this year's presidential election, calling an end to 38 years as head of state, but he will retain control of the powerful ruling party.
Dos Santos, aged 74, said in March last year he would not run in elections due in August but opponents remained suspicious given he had reneged on similar pledges during nearly four decades running Angola.
The ruling People's Movement for the Liberation of Angola (MPLA) approved 62-year-old Defence Minister Joao Lourenco as its presidential candidate at a meeting on Dec. 2, dos Santos said in a televised speech.
Lourenco told Reuters he was ready to step out of dos Santos' shadow and lead the ruling party's campaign despite having only seven months before national polls.
"It is a big challenge, but I believe that although difficult, it is not impossible to replace president dos Santos," Lourenco said in the capital Luanda shortly after the announcement of his candidacy.
Dos Santos, a communist-trained oil engineer and a veteran of the guerrilla war against Portuguese rule, will remain president of the MPLA, retaining sweeping powers that include choosing parliamentary candidates and appointing top posts in the army and police.
His inscrutable public demeanour belies his tight control of Angola, where he has overseen an oil-backed economic boom and the reconstruction of infrastructure devastated by a 27-year civil war that ended in 2002.
"The real news is Dos Santos hanging on," said Gary van Staden, political analyst at NKC African Economics.
"He is going to stay in a very powerful position in the party, which means he is going to stay in control and the president will defer to him."
DOS SANTOS DYNASTY
Despite its oil wealth, most of Angola's 22 million people live in poverty and they have become increasingly frustrated in recent years as low crude prices hammered growth in sub-Saharan Africa's third largest economy.
Critics accuse Dos Santos - Africa's second longest-ruling leader after Equatorial Guinea's President Teodoro Obiang Nguema Mbasogo - of mismanaging Angola's oil wealth and making an elite, mainly his family and political allies, vastly rich in a country ranked amongst the world's most corrupt.
Married to former model and air hostess Ana Paula, 18 years his junior, dos Santos has been accused of trying to build a family dynasty to control Angola beyond his lifespan.
Isabel dos Santos was appointed by her father as head of the state oil company Sonangol last year and his son Jose Filomeno is chairman of Angola's sovereign wealth fund.
"He's pursuing a legacy plan with family members retaining control of key financial institutions," said Darias Jonker, Africa Director at Eurasia Group. "We see signs that he plans to retain some power behind the throne."
The MPLA won parliamentary majorities in the three elections since the end of the war.
Lourenco, a former soldier and deputy president of the MPLA, is a close ally of dos Santos. Also a veteran of the independence struggle, Lourenco studied history in the Soviet Union from 1978 to 1982 before starting a long career in politics.
"Lourenço has proven himself as competent technocrat without major scandals in his past and he's probably the best selection the party could have made," Jonker said.
As well as being a MPLA stalwart, Lourenco speaks Russian, Spanish and English, plays chess and practises Shotokan karate in his spare time, a personal biography says.
Angolans in the streets of the capital Luanda were cautiously optimistic of the prospects of life under a new president for the first time in nearly four decades.
"Without the presence of the president, the republic is likely to become stronger, because he has already given the best he had to give to the party," said 33 year-old sales manager Isabel Almeida.
Some Angolans were more sceptical, saying they preferred to wait and see whether dos Santos would truly step down and relinquish his grip on the administration.
"I think that seeing is believing, because the president has spoken so many times about retiring but never accomplished it, said paper boy, 28.
(Additional reporting by Ed Stoddard in Johannesburg, Writing by Joe Brock and Mfuneko Toyana, Editing by Angus MacSwan and Dominic Evans)