MOSCOW (Reuters) - Russian President Dmitry Medvedev on Tuesday abruptly sacked veteran Moscow mayor Yuri Luzhkov, a powerful political opponent who criticized the Kremlin and then defied pressure to resign.

Luzhkov, 74, a pillar of the ruling United Russia party, had ruled the capital since 1992, but angered Medvedev by suggesting the country needed a stronger and more decisive leader. The remark seen as favoring the prime minister, Vladimir Putin.

Putin offered support for Medvedev’s decision, suggesting the mayor had overstepped the mark by challenging the Kremlin. But he also praised Luzhkov and made clear that he himself would help choose a successor.

Luzhkov, famous for his flat working man’s caps, billionaire second wife and blunt manner, used a $37-billion budget to keep pensions and public services high, remaining relatively popular despite corruption allegations, which he always denied.

The rare public spat among Russia’s secretive elite was widely seen as a test of the resolve of Medvedev, junior partner to Putin in Russia’s ruling tandem, ahead of the 2012 presidential election.

Medvedev, on a state visit to China, issued a decree stripping Luzhkov of his post. Russian news agencies said Luzhkov learned he had been sacked from a television report.

“As president of Russia I lost my trust in Yuri Mikhailovich Luzhkov as the mayor of Moscow,” Medvedev told journalists. “I will decide who will lead Moscow.”

But Putin indicated it would be a joint decision, saying: “I hope I will have a chance to express my opinion.”

SUCCESSOR NOT FINALISED

He they had discussed the issue and that United Russia had begun discussing successors but had not yet come up with a list to submit to the president.

In his first public comments on the showdown between Medvedev and Luzhkov since it erupted into the open three weeks ago, Putin depicted it as a personal clash and struck a delicate balance that seemed to place him above the fray.

“Yuri Mikhailovich (Luzhkov) did a great deal for Moscow’s development and is something of a symbolic figure in modern Russia,” Putin said.

“But it is completely clear that the mayor’s relations with the president didn’t work out,” he told reporters at a paper mill in northern Russia. “The mayor is the president’s subordinate and not the other way around -- therefore steps had to be taken to resolve the situation.”

While the constitution allows the president to sack the Moscow mayor and regional governors and name a successor, top officials almost always resign before they are fired.

Luzhkov himself made no public comment but United Russia said he had quit the party.

On Monday, Luzhkov had returned from a holiday abroad vowing not to resign, a challenge the Kremlin could not ignore.

The magazine New Times published what it said was a letter from Luzhkov to Medvedev that had been delivered to the Kremlin.

It called Medvedev a hypocrite and accused the Kremlin of unleashing “an unprecedented campaign” to discredit the mayor.

Medvedev’s choice of an acting mayor suggested Luzhkov had not lost out entirely. Vladimir Resin has been first deputy mayor since 2001, and has responsibility for construction.

The business daily Vedomosti last year published a photograph of Resin wearing a Swiss watch that cost more than a million Swiss francs ($1 million).

Resin told the daily Komsomolskaya Pravda that he did not expect to be in the job long.

Moscow's Mayor Yuri Luzhkov attends a ceremony to start the construction of a new section of the city underground railway in the capital Moscow, September 18, 2010. REUTERS/Denis Sinyakov

CORRUPTION ALLEGATIONS

Luzhkov’s tenure was tainted by allegations that his billionaire construction boss wife, Yelena Baturina, benefited from his post -- allegations that the pair strenuously deny.

Suggestions of corruption were a focus of mud-slinging programs that state-run television began showing this month after Luzhkov aimed thinly veiled criticism at Medvedev in a September 6 article in the official newspaper Rossiiskaya Gazeta.

He wrote that “the Russian government needs to recover its true authority and meaning.”

“It is unprecedented in the past decade for the internal tensions of the elite to become so public,” said Maria Lipman, analyst at the Moscow Carnegie Center.

Luzhkov’s term was due to expire in June. Analysts said the Kremlin wanted to give a successor time to settle in and ensure a strong vote for United Russia in parliamentary elections later in 2011.

Medvedev and Putin have said they will decide jointly who runs for president in March 2012, though most insiders believe the last word will be Putin’s.

Luzhkov was appointed by Boris Yeltsin months after the Soviet Union collapsed in 1991, elected mayor three times, and appointed again by Putin in 2007.

Riding a wave of petrodollars, he oversaw a construction boom that helped turn drab Soviet-style central Moscow into a glamorous, vibrant 24-hour capital. But Moscow is also plagued by traffic nightmares and a huge gap between rich and poor.

Luzhkov’s control over coffers in the city, which accounts for one-fifth of the nation’s GDP, or $320 billion, allowed him to keep pensions among the highest in Russia.

His dismissal appeared to have little impact on financial markets in Moscow, which had been widely expecting the move.

Yields on Bank of Moscow’s 2013 Eurobond were trading at 5.462 percent at 1445 GMT after falling early in the day to a two-month low of 4.576 percent. Shares in the Bank of Moscow closed down 0.1 percent, compared to a 0.6 percent fall on the broader MICEX index.