By Matt Falloon and Tim Castle
LONDON (Reuters) - British Prime Minister David Cameron kept unpopular finance minister George Osborne in place on Tuesday in a reshuffle he hopes will revive the Conservative-led government's fortunes halfway through a term dominated by recession and austerity.
Cameron's office billed his first cabinet rejig as a game changer for a government finding it increasingly difficult to heal the economy, but heavyweights such as Foreign Secretary William Hague stayed put and few changes are expected in policy.
The prime minister's scope for a sweeping overhaul is limited by the constraints of life in coalition with the left-leaning Liberal Democrats and the danger of creating enemies among his own Conservatives at a delicate time.
"In some respects the right of the party has been strengthened, but it's difficult to see it fundamentally changing the course of the government or its reputation," said Wyn Grant, a professor of politics at the University of Warwick.
"What it might do is to help unify the Conservatives in parliament. The crucial area is economic policy and the continued recession - if that turns around that will benefit the government's popularity more than a reshuffle."
Osborne, a close Cameron ally, was booed by crowds before he presented medals to winners at the Paralympics on Monday night, highlighting discontent with budget cuts that have repeatedly missed the government's targets, and the general economic gloom.
Polls show many Britons think Osborne should be sacked. But replacing too many senior ministers could be interpreted as an admission of policy failure, particularly on the economy.
Shifting Osborne from his post would also raise questions on financial markets about Cameron's resolve in tackling Britain's large budget deficit.
Cameron, who has seen his party's popularity fall as the economy sours, has stuck to his guns with austerity measures, hoping growth will return before the next election in 2015.
The dire state of the economy has forced the prime minister to make some changes to his economic team, however.
City minister Mark Hoban took up a new job in the work and pensions ministry, with Cameron drafting London Olympics organizer and former Goldman Sachs banker Paul Deighton into the Treasury as a minister responsible for economic delivery.
The Conservative leader also moved 72-year-old Justice Secretary Ken Clarke - a former finance minister - to a floating role with an economics brief.
Lib Dem David Laws, another respected economic brain, was brought in to a ministerial job, with a junior portfolio at the education ministry alongside a roving economics remit.
That was the only significant change for the Lib Dems, with business minister Vince Cable and Osborne's number two Danny Alexander among those keeping their senior cabinet positions.
The reshuffle is being seen more as an exercise in improving Cameron's relationship with his own party, which is starting to fear for its chances of re-election.
Figures from the Conservative right were promoted and concessions made to a rebellious "eurosceptic" wing that demands a tougher line on relations with Brussels.
Clarke's move, in effect a demotion for one of the most outspoken pro-Europe Conservatives, was cheered by the eurosceptics.
"The end of the coalition would have been the ideal reshuffle but, compared to where I thought we would be today, we are in a very much stronger position; you can see the Conservative-ness of this government," said Conservative lawmaker Peter Bone.
"We've seen a tilting towards a more Conservative cabinet."
Clarke said Cameron was "not remotely" bowing to pressure to push his part of the government to the right.
The biggest promotion came for former Culture Secretary Jeremy Hunt, who took over what he called the "huge task" of selling controversial plans for reforms at the health ministry to a skeptical public and medical profession.
Hunt survived calls to quit this year for his handling of Rupert Murdoch's attempt to take over British broadcaster BSkyB.
Cameron switched Justine Greening from transport to international development, removing her from the debate over whether the government should build a third runway at London's Heathrow airport, bitterly opposed by residents in her nearby parliamentary constituency.
The move reignited speculation that a third runway - which the coalition has pledged to reject - could be on the cards.
"There can be only one reason to move her, and that is to expand Heathrow airport. We will fight this all the way," said Mayor of London Boris Johnson, a popular Conservative tipped as a future replacement for Cameron.
Financial markets, watching for any sign of a rethink of Britain's austerity plan, brushed aside the reshuffle.
"It is all political rather than economic," said Bank of America Merrill Lynch fixed income strategist John Wraith.
(Additional reporting by David Milliken; Editing by Peter Graff and Will Waterman)