Irish central bank chief cautions on recovery as prepares to retire

* Honohan confirms will retire towards end of 2015

* Cautions of degree of fragility with legacy of debt

* Government to appoint successor before 2016 election (Adds quotes, fin min quote,)

By Padraic Halpin

DUBLIN, May 1 (Reuters) - Ireland (Other OTC: IRLD - news) 's economy is still showing the scars of the financial crisis and will need to be managed very carefully, central bank Governor Patrick Honohan said on Friday as he confirmed he would retire at the end of the year.

Honohan, who was appointed in late 2009 during Ireland's financial difficulties, said it was a good time to step down as the bank was moving away from a crisis management phase with the economy recovering and banks back in profit.

A leading academic economist, Honohan oversaw a mass recapitalisation of Ireland's banks and an overhaul of financial regulation. He helped negotiate the international bailout sought in 2010 that Ireland emerged from 18 months ago.

"I don't want to exaggerate the degree to which the crisis damage has been fixed," Honohan told a news conference. "The situation is well on the road to repair but there is a degree of fragility which means management of the economy has to be very, very prudent and cautious."

"A lot of the legacy damage is still there, it's there in households, it's there in firms, it's still there in banks. There is certainly a lot less fragility than there was."

The European Commission backed up Honohan's cautious tone on Friday, saying at the end of a post-bailout surveillance mission that while progress continued in Ireland, the legacies of the crisis demand further determined policy efforts.

Honohan's retirement before his term was scheduled to end in September 2016 means the government must name a successor, who will also sit on the governing council of the European Central Bank (ECB), before parliamentary elections due early next year.

The government are unlikely to revert to the pre-crisis tradition of promoting the top civil servant at the Department of Finance to the governor role. The current Secretary General at the department is less than a year in the job.

Neither of Honohan's two deputy governors, Stefan Gerlach and Cyril Roux, are likely to be promoted to lead the bank, the Irish Independent said on Friday, quoting unnamed sources.

Honohan said he would have liked to have overseen more progress on banks' mortgage arrears but after earlier this year introducing tough new restrictions on mortgage lending to avoid any repeat of the crisis, he said he had done all he wanted to.

"I know people complain maybe a bit that I try to make light of things but I've always been acutely aware that the stakes were enormously high and mistakes could have been enormously costly," Honohan said, referring to his often chipper demeanour.

"All of the policies that I can think of that are likely to be effective and safe are in place or are well on the way. Now (Frankfurt: 11N.F - news) it's a safe time for to think of retirement." (Editing by Toby Chopra)