By Kate Holton and Costas Pitas
LONDON (Reuters) - New Prime Minister Theresa May showed a ruthless streak on Thursday in building a cabinet to lead Britain's exit from the European Union, while her finance minister said he would do whatever was necessary to restore confidence in the economy.
A day after replacing David Cameron, May moved to impose her authority by axing a handful of prominent ministers including Justice Secretary Michael Gove, a leading 'Brexit' campaigner who had staged his own bid for prime minister.
Her most contentious appointment is Foreign Secretary Boris Johnson, who compared the EU's aims to those of Hitler and Napoleon during the campaign leading up to Britain's vote last month to quit the 28-nation bloc.
The surprise choice drew a withering response from French Foreign Minister Jean-Marc Ayrault, who described the former London mayor as a liar.
Three weeks after the referendum, May's new government faces the formidably complex task of extricating Britain from the EU - itself reeling from the shock of Brexit - while trying to protect the economy from feared disruption to confidence, trade and investment.
The Bank of England kept interest rates unchanged on Thursday, wrong-footing many investors who had expected the first cut in more than seven years. But it said it was likely to deliver a stimulus in three weeks' time to support the economy, once it has assessed the fallout from the June 23 vote. The pound rose sharply on the news, while shares fell.
New finance minister Philip Hammond signaled he would take a less aggressive approach to cutting the budget deficit than his predecessor George Osborne, who was dumped on Wednesday.
"Markets do need signals of reassurance, they need to know that we will do whatever is necessary to keep the economy on track," Hammond said.
"Of course we've got to reduce the deficit further but looking at how and when and at what pace we do that ... is something that we now need to consider in the light of the new circumstances that the economy is facing."
May, who had favored a vote to stay in the EU, must now decide when and how to start official divorce proceedings from the other 27 countries, who are pressing her to move quickly to lift the uncertainty now hanging over them all.
In her first words to the nation on Wednesday, she promised to champion social justice and to help ordinary Britons in their struggle to make ends meet.
"The government I lead will be driven not be the interests of the privileged few, but by yours. We will do everything we can to give you more control over your lives," she said.
Britons chose Brexit despite a barrage of warnings that severing ties would create huge uncertainty and plunge the economy into recession. The winning 'Leave' campaign dismissed what it called 'Project Fear', saying Britain would prosper if it regained independence from Brussels.
One of the first economic indicators to capture the post-referendum mood showed on Thursday that British consumer confidence fell sharply after the vote. The Thomson Reuters/Ipsos Primary Consumer Sentiment Index fell to 49.4 in July from last month's 51.2.
"It's too early for most people to experience any direct economic impacts from Brexit, but fear for the future is clearly being felt by many," said Bobby Duffy, managing director of public affairs at Ipsos MORI.
In one of her first acts, May dismissed finance minister Osborne, a figure synonymous with austerity policies and a leading voice among those who had warned that leaving the EU would spell economic doom.
On Thursday she followed up by removing the justice, education, culture and cabinet office ministers.
Work and pensions minister Stephen Crabb, who had also sought the prime minister's job, resigned citing family reasons, days after the married politician had hit the front pages for allegedly sending flirtatious WhatsApp messages to a young woman. The Northern Ireland minister also quit.
Veteran right-wingers David Davis and Liam Fox - both ardent campaigners for Brexit - have been named, respectively, as Secretary of State for Exiting the European Union and head of a new international trade department, key positions in the arduous negotiations ahead.
Asked if Britain would launch the formal process of quitting the EU by the end of this year, finance minister Hammond told LBC radio: "No, that's a decision that we haven't made yet."
He said the decision to vote for Brexit would mean Britain would leave the EU's tariff-free single market, and it would then have to negotiate a new deal as a trading partner rather than a member.
"The question is how we negotiate with the European Union not from the point of view of being members but from the point of view of being close neighbors and trade partners," he added.
U.S. Treasury Secretary Jack Lew urged EU and British officials to be flexible in negotiations.
"We think it is critical that negotiations take place in a pragmatic, transparent and smooth manner where both sides demonstrate flexibility in order to produce results that are the right outcome," he said.
'BACK AGAINST THE WALL'
The biggest surprise of May's cabinet so far has been the appointment of Johnson, until recently seen as her top rival for prime minister.
Johnson was the figurehead of the successful Leave campaign, but since the referendum had suffered widespread criticism and ridicule for failing to present a clear Brexit plan and swiftly dropping out of the leadership race.
With his unkempt blonde hair, bumbling humor and penchant for gaffes, he is a colorful but contentious choice for conducting sensitive diplomacy with world leaders.
"Clearly British humor has no borders," tweeted former Belgian Prime Minister Guy Verhofstadt.
Reaction from Paris to his appointment was blunt.
"I am not at all worried about Boris Johnson, but ... during the campaign he lied a lot to the British people and now it is he who has his back against the wall," Foreign Minister Ayrault said.
He said in the current climate he needed a "clear, credible and reliable" partner. "We cannot let this ambiguous, blurred situation drag on ... in the interests of the British themselves."
(Additional reporting by William James, Kylie MacLellan, William Schomberg, David Milliken, Andy Bruce, Karin Strohecker, Michael Holden, Paul Sandle and Ana Nicolaci da Costa; Writing by Mark Trevelyan; Editing by Pravin Char)