By Tova Cohen
TEL AVIV (Reuters) - Israel on Sunday named Karnit Flug as the first woman to head its central bank and meet the challenge of a rising shekel after a rocky selection process that dragged on for months.
Flug, 58, was deputy to previous governor Stanley Fischer and has been acting chief of the Bank of Israel since her predecessor stepped down in June after eight years in the job.
Accepting the post, Flug, said in a brief statement the central bank and Israel's economy faced significant challenges.
The rise in the shekel - up 7 percent against the dollar since January - has already hit Israel's exports and last month a monetary policy committee headed by Flug surprised the market with a quarter point cut in the benchmark rate.
Analysts said the bank's 1.0 percent benchmark rate limited its scope for further cuts and suggested fresh market intervention might be one way to curb currency appreciation.
Analysts and traders welcomed Flug's appointment.
Amir Eyal, chairman of the Infinity investment house, said he expects Flug to implement an expansive monetary policy, supporting exports and employment and following Fischer's footsteps.
As governor, Fischer bought billions of dollars to help weaken the shekel.
Oren Eldad, head of trading house ATrade, said Flug's appointment was not likely to have an immediate impact on the exchange rate, which is largely affected by global events. Israel's foreign currency market is closed on Sundays.
"There will be a 'responsible adult' now that can carry out more substantial purchases (of dollars) when speculators try to test the dollar/shekel rate," he said.
BACKED BY FISCHER
Flug's appointment followed a meeting between Prime Minister Benjamin Netanyahu and Finance Minister Yair Lapid, who had been unable since Fischer resigned to fill the post.
Fischer recommended Flug to succeed him but Netanyahu, officials said, preferred candidates with a stronger international standing.
Netanyahu and Lapid initially chose Jacob Frenkel, central bank governor in the 1990s and chairman of JPMorgan Chase International (JPM.N), to succeed Fischer but he pulled out following reports he had been arrested on suspicion of shoplifting at Hong Kong's airport in 2006.
Frenkel denied any wrongdoing and authorities in Hong Kong decided not to pursue the case.
A second candidate, Bank Hapoalim Chief Economist Leo Leiderman, also dropped his bid two days after his nomination, citing personal reasons.
Netanyahu and Lapid said in a statement: "We were impressed by Dr. Flug's performance over the past months as head of the Bank of Israel and we are confident she will continue to help us lead Israel's economy to further achievements in the face of the world economic upheaval."
The announcement sparked rare praise from the opposition, whose leader Shelly Yachimovich said she "tipped her hat" for what she called an enlightened appointment.
"Even if the process was faulty and at times ridiculous, Netanyahu needed courage to backtrack from his mistake and correct it, and in the end made the best decision," she said.
Flug completed her doctorate at New York's Columbia University and worked at the International Monetary Fund as an economist and later as a senior research economist at the Inter-American Development Bank.
She was appointed director of the research department at the Bank of Israel in 2001.
Three other candidates for the governorship were thought to include former Argentinian central bank president Mario Blejer, former Bank of Israel Deputy Governor Zvi Eckstein and former Mizrahi-Tefahot Bank (MZTF.TA) Chief Executive Victor Medina.
(Additional reporting by Ari Rabinovitch, Editing by Jeffrey Heller and David Cowell)