By Phil Stewart and Andrea Shalal-Esa
WASHINGTON (Reuters) - Deputy Defense Secretary Ashton Carter, known for his deep knowledge of U.S. defense spending and the defense industry, said on Thursday he was stepping down in December after four years in top Pentagon jobs.
Defense Secretary Chuck Hagel said he "reluctantly accepted" Carter's decision to leave the post.
It was unclear who might replace Carter, although several names surfaced late Thursday as possible successors: Navy Secretary Ray Mabus, former Air Force Secretary Michael Donley and the Pentagon's former policy chief, Michele Flournoy.
Another possible contender might be Linda Hudson, a long-time defense industry executive who has announced plans to retire early next year as chief executive of BAE Systems Inc, the U.S. unit of Britain's BAE Plc.
As deputy defense secretary over the past two years, Carter, who has a doctorate in theoretical physics from Oxford University, helped ensure a smooth hand-off from then Defense Secretary Leon Panetta to Hagel.
"He possesses an unparalleled knowledge of every facet of America's defense enterprise, having worked directly and indirectly for eleven secretaries of defense over the course of his storied career," Hagel said in a statement.
Carter, a long-time Harvard University professor, himself had been rumored to be a contender for the defense secretary job before Hagel's name emerged as the top candidate. Some speculated he could be a possible head of the Department of Energy.
Loren Thompson, a Virginia-based defense consultant, said Carter's departure robbed the Pentagon of an experienced manager and could also open the door for mergers among bigger defense companies.
"Carter was the policymaker who said no mergers between top-tier defense contractors. That prohibition is likely to leave with him," he said.
"At the rate demand is declining, there is not going to be enough business for some of the bigger players in information technology, electronics and other defense sectors."
Before becoming deputy defense secretary, Carter was the defense undersecretary for acquisition, technology and logistics, wrangling with complicated weapons programs such as Lockheed Martin Corp's F-35 fighter program.
His deputy and successor in that job, Frank Kendall, was also mentioned as a possible contender for the No. 2 position. Kendall is seen as a strong, no-nonsense inside manager, and someone whom Hagel likes and respects.
Carter said he had long planned to step down on December 4 but delayed his announcement because of financial uncertainty facing the Defense Department, which has been affected by the partial government shutdown that started on October 1 and across-the-board budget cuts that forced it to put civilian employees on unpaid leave this summer.
"But I have decided that this situation might well continue and I don't want any more time to pass before giving you the opportunity to begin a smooth transition," Carter said in his resignation letter to Hagel.
Hagel and other senior officials gave Carter a standing ovation at the meeting where his departure was announced.
"He'll be missed by the secretary. They've had a strong and effective working relationship and friendship that will continue," said Pentagon spokesman George Little. "There's a lot of work to do between now and December 4."
(Additional reporting by David Alexander; Editing by James Dalgleish and Mohammad Zargham)
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