UPDATE 1-Erdogan allies likely to dominate Turkey's new cabinet

* Davutoglu expected to be next prime minister

* Economic team likely to remain in place

* Erdogan allies touted to take on cabinet roles

(Adds sources on likely shape of new cabinet)

By Orhan Coskun and Jonny Hogg

ANKARA, Aug 20 (Reuters) - Turkish president-elect Tayyip

Erdogan looks set to maintain his influence on daily politics

after being sworn in next week, with close allies likely to take

on cabinet posts in a new government and his economic team

expected to remain largely intact.

Outgoing president Abdullah Gul said on Tuesday that Foreign

Minister Ahmet Davutoglu was likely to take over as chairman of

the party and become the next prime minister, rekindling

speculation about the shape of the new cabinet.

Davutoglu, an academic who has served as Erdogan's foreign

minister for the past five years, is expected to be confirmed as

the ruling AK Party's nominee for chairman on Thursday before

being formally voted in at an AK general assembly on Aug. 27.

Senior AK officials told Reuters that ministers responsible

for the economy would remain in place under Davutoglu, and that

close Erdogan allies including his top aide Yalcin Akdogan and

intelligence chief Hakan Fidan might be given cabinet positions.

Investors have been particularly concerned about the fate of

Deputy Prime Minister Ali Babacan and Finance Minister Mehmet

Simsek, who have guided the Turkish economy towards

unprecedented stability in recent years.

"The decision will be up to Erdogan and Davutoglu, but in

the new cabinet which is expected to be formed at the beginning

of September, no changes are expected with Babacan and Simsek or

other economic portfolios," one senior AK official said.

Erdogan, who co-founded the AK Party and has dominated

Turkish politics for more than a decade as prime minister, won

the country's first national presidential election on Aug. 10

with more than 51 percent of the vote.

Senior officials had told Reuters before the vote that

economic ministers would be retained at least until a

parliamentary election next June if Erdogan won.

Erdogan will step down as leader of the AK Party when he is

inaugurated on Aug. 28, as required by the constitution, but has

made clear that he wants the party he co-founded with Gul more

than 10 years ago to remain loyal and unified.

"Davutoglu is certainly someone that Erdogan can control,

because he doesn't have his own constituency. Erdogan made him.

He's about the most amenable prime minister that could be

chosen," one European diplomat said.

HIGH STAKES

Erdogan wants a strong and loyal party leader to boost the

AK's majority in next June's election, a result which would help

him to change the constitution and strengthen the powers of the

presidency.

While Davutoglu is likely to back him in this, he lacks

strong support among the AK's core voters, meaning Erdogan is

likely to try to continue to assert his influence over the party

even after breaking formal ties.

"Davutoglu lacks Erdogan's caustic rhetorical skills and

ability to inspire almost fanatical personal devotion amongst

the AKP's grassroots. He is likely to struggle to impose himself

and be dependent on Erdogan to maintain party unity," risk

research firm Teneo Intelligence's Wolfango Piccoli said.

"If Davutoglu performs badly, fears that the AKP could lose

its majority at the next general election ... may lead to calls

for Gul to return to lead the party, raising the possibility of

an intensification of Gul's long-running rivalry with Erdogan."

Davutoglu has overseen Turkish foreign policy at a turbulent

time for the Middle East, with wars in neighbouring Iraq and

Syria and the Arab Spring uprisings, but his "zero problems with

the neighbours" policy has crumbled, with relations degraded

with Egypt, Syria, Israel, Iraq and Iran.

"In the Middle East he is basically persona non grata ...

they're isolated. Countries like Egypt are hardly going to be

happy if he is prime minister and Erdogan is president," the

European diplomat said.

Gul, who commands respect among core AK voters and is seen

as a more conciliatory figure than Erdogan, had long been touted

as a future prime minister. But he has been sidelined in recent

months and, with the AK general assembly a day before he leaves

office, could not in any case immediately become party leader.

Senior AK officials said intelligence chief Hakan Fidan, one

of Erdogan's closest confidantes, and EU minister Mevlut

Cavusoglu were being considered as possible replacements for

Davutoglu in the role of foreign minister.

Top aide Yalcin Akdogan was also expected to take up a

position in cabinet, possibly as a deputy prime minister, while

AK deputy chairman Mustafa Sentop is seen as a candidate for

justice minister, the officials said.

(Writing by Nick Tattersall; Editing by Louise Ireland)