Putin's support of First Deputy Prime Minister Medvedev has been received as the president's signal that Russia will stick to its free market aspirations and seek close ties with the West.
Medvedev, who chairs the board of directors of state-controlled natural gas giant Gazprom, was formally nominated by the ruling United Russia and three minor pro-Kremlin parties. Given Putin's popularity and support of most of the legislature, his endorsement is likely to guarantee Medvedev the presidency.
Putin said on national television: "I have known Dmitry Medvedev well for over 17 years, and I completely and fully support his candidature."
Medvedev, 42, a trained lawyer, worked under Putin in the early 1990s in the mayor's office of St. Petersburg, the president's hometown. In Moscow in 1999, he was appointed acting deputy chief of the presidential staff.
He also headed the president's campaign headquarters in the run-up to the 2000 election. In 2003, he became chief of the presidential administration and retained the post until November 2005, when he was appointed first deputy prime minister and put in charge of an ambitious multi-billion-dollar "national project" to improve living standards.
He will be formally nominated as presidential candidate at a United Russia congress on December 17.
Reaction of Russian analysts
"This is positive news for the market as the most liberal of the possible presidential candidates was approved," Yaroslav Lisovolik, a senior Deutsche Bank economics analyst, said. "The liberal aspect of Putin's economic policy can be preserved if Medvedev becomes president."
Echoing the statement, an economist at Russian brokerage Troika Dialog said the news would encourage investment in the country. Anton Struchevsky said Medvedev was a liberal politician, unlike another first deputy premier and ex-defense minister also widely tipped for the presidency, Sergei Ivanov, whose KGB background was treated with apprehension by Western countries.
However an analyst with Trust investment bank, Yevgeny Nadorshin, said Medvedev's appointment would not influence the investment climate in Russia, and that there was in fact little difference between the candidates.
Italian and German political analysts said they were surprised by Putin's backing of a 'strong' presidential candidate, rather than a loyal supporter who would let him keep the reins of power.
"This came as a real surprise for the West, which had expected Putin to propose a less weighty figure as presidential candidate," Roberto Menotti of Aspen Institute Italia said. "But he backed a strong candidate capable of taking on responsibility and making independent decisions."
Putin, while saying he will not violate the Constitution by remaining in the Kremlin for a third term, has pledged to retain influence in Russian politics. Various theories have been circulated in domestic and foreign media as to what position the president could opt for after the polls next year.
One of the scenarios was that Putin would back a weak successor with a view to returning to power within the next few years.
There was wide media speculation that Prime Minister Viktor Zubkov, 66, who held no senior political posts until unexpected appointment as prime minister in September, would assume the presidency in a setup where key powers would be transferred to a government led by Putin.
Alexander Rahr, a leading German expert on Russia, agreed that the nomination was a surprise.
"Medvedev's nomination is undoubtedly a surprise, as Western analysts had believed Putin would pick a tougher candidate from his retinue of 'siloviki'. But the surprise was a pleasant one, as Medvedev is not one of the group of ex-KGB officers, but a champion of the free market."
Rahr said: "I believe Medvedev could be quite a strong president, and scenarios under which Putin would return to power, as predicted by Western analysts, are unlikely." However, the Kremlin's security bloc will not give away its positions easily, he said.
Post-presidency job prospects for Putin
The nomination again raises the question of what role Putin will pick for himself after his term expires.
Russian media reports last week suggested Putin could head the union Russia and Belarus have been trying to create since 1997. Efforts to form the state have in the past been marred by energy and financial disputes.
The Kremlin dismissed the reports, which cited sources in the Belarusian president's administration, as "speculative fantasies."
Communist Party leader Gennady Zyuganov said on Monday that Putin was likely to hold a referendum on merging the two ex-Soviet neighbors soon after nominating Medvedev, and would head the union state once the idea was backed. Belarusian President Alexander Lukashenko would be parliamentary speaker in the new state, according to earlier media reports.
Putin's supporters have called for him to be declared "national leader" without any formal position but with major influence on domestic and foreign policies, to ensure the country's further growth.
Other jobs mentioned as possible options for Putin's include Gazprom chief, and head of the Constitutional Court or Security Council.