Toledo, whose popularity rating is down to less than 16 percent, is struggling with a crisis of credibility after failing to deliver on promises of more jobs and wealth in this Andean nation, where millions live on little more than $1 a day.

Toledo was expected to unveil his new team on Friday, ahead of his first anniversary in office on July 28, in a bid to give his fractious Peru Posible party more clout and build bridges with the opposition.

The exit of Pedro Pablo Kuczynski, a relaxed, tennis- and flute-playing former fund manager, is expected to hand the herculean task of balancing Peru's budget back to his predecessor, Javier Silva Ruete, who had the job for eight months in 2000-2001.

The key question is what will happen to Peru's economic policy. Kuczynski's privatization and austerity programs had made him one of Toledo's least-loved ministers. But the new incumbent will have little room for maneuver in seeking to plug a budget deficit without much cash -- especially with the temptation to spend likely to rise ahead of regional elections in November in which Toledo's party is expected to fare badly.

"Toledo is very worried about the decline in his popularity and backlash to the privatization program," said Thomas Trebat, emerging markets research head at Salomon Smith Barney.

"Some of that he hopes to reverse by offering up Pedro Pablo Kuczynski as the price that has to be paid ... I think there will be a period of some skepticism (in the market) pending a clearer future direction ... from Toledo himself."

Peru, Latin America's No. 7 economy, is desperate for a good name abroad to attract foreign investment after a government corruption scandal erupted in late 2000, felling then-President Alberto Fujimori and spooking markets.

Peru's country risk -- the spread of its bonds over U.S. treasuries -- widened from recent days to 715 basis points as nervous investors waited for news of who would take over. Peruvian bonds fell in New York and the sol currency closed at a new year's low of 3.5535 against the dollar.

TOLEDO STALWART FOR PREMIER?

Roberto Danino, who left his job as a high-flying Washington lawyer, is widely expected to be replaced as prime minister by Luis Solari, a doctor and former health minister.

Solari is a senior Peru Posible figure who analysts say should be able to bring the government closer to its party in Congress, with which it has often been at odds.

Toledo has also been hunting for a new foreign minister after Diego Garcia Sayan quit earlier this week. Media reports have tipped Peru's ambassador in Washington, Allan Wagner, for that post, or perhaps for the job of prime minister.

Wagner served as foreign minister during ex-President Alan Garcia's 1985-90 term, and his appointment would be seen as an overture to Garcia's American Popular Revolutionary Party, the main opposition force.

Analysts say Toledo -- a former business school professor untested in public office until his election last year -- lacks direction; peace with Garcia's APRA could help steady his rocky ship.

Ministers say they also expect changes in the transport, women's and energy portfolios.

Kuczynski said he was leaving happy to have steered Peru into growth, but sad at not having achieved all his aims.

"The president explained to me yesterday that he wants a more political cabinet and this is the reason for my exit," Kuczynski told RPP radio.

Pablo Secado, economist at the Peruvian Institute of Economics, said the change from Kuczynski "is clearly going to give political oxygen to the government."