* Former bank head ousted amid money laundering investigation
* New chief approved by Pope Benedict as he nears retirement
* Links to warship company under scrutiny
VATICAN CITY, Feb 15 (Reuters) - The Vatican appointed a German lawyer to head its bank on Friday, but the bid to turn the fortunes of the scandal-hit institution was clouded by his business links to a military shipbuilder.
The appointment, made by a commission of cardinals, was approved by Pope Benedict and is likely one of his last major decisions before he resigns at the end of the month, a move he announced on Monday, stunning Catholics around the world.
As chairman of the Institute for Works of Religion (IOR), Ernst von Freyberg will head efforts to improve the image of the Vatican's bank which is under investigation for money laundering and has been without a head for nine months.
But within minutes of announcing his appointment, the Vatican faced a new public relations challenge when asked to explain Freyberg's chairmanship of Blohm + Voss, a Hamburg-based shipbuilder in which he is a minority shareholder.
Reporters asked Vatican spokesman Father Federico Lombardi how the Church could justify hiring someone who worked for a company with a long history of making warships, including for Nazi Germany.
After initially announcing that the company was no longer involved in that business, the Vatican later issued a statement saying that, while Blohm + Voss's main activity was ship repair and luxury yacht making, it was also "part of a consortium that is building four frigates for the German navy".
British buyout firm STAR Capital which bought Blohm + Voss in 2011 from ThyssenKrupp said at the time it was acquiring the non-military parts of the industrial conglomerate's ship business.
Lombardi said the fact that Freyberg organised pilgrimages to the shrine at Lourdes and was a Knight of Malta - an elite member of a charitable organisation with roots in the Crusades - was proof he had the "considerable human and Christian sensibility" needed for his new role.
In a further clarification, the Vatican said that when Blohm + Voss's work on the four warships is complete, the company "will be 100 percent non-military".
Freyberg takes a position that has been vacant since May when the bank's board ousted the then head Ettore Gotti Tedeschi, accusing the Italian of neglecting his basic management responsibilities.
Gotti Tedeschi's unusually abrupt dismissal, along with the arrest of the pope's butler for stealing confidential papal documents, was the culmination of a leaks scandal that shook the Vatican and weighed on Benedict's papacy.
The Vatican has been trying to shed its image as a suspect financial centre since 1982, when Roberto Calvi, an Italian known as "God's Banker" because of his links to the Vatican, was found hanging from London's Blackfriars Bridge.
In July, a European anti-money laundering committee said the Vatican bank failed to meet all its standards on fighting money laundering, tax evasion and other financial crimes.
The report by Moneyval, a monitoring committee of the 47-nation Council of Europe, found the Vatican passed nine of 16 "key and core" aspects of its financial dealings.
The report said IOR was making changes to meet the other requirements but found major failings in the running of the bank.
In 2010, Rome magistrates froze 23 million euros ($33 million) that IOR held in an Italian bank. The Vatican said at the time that its bank was merely transferring its own funds between its own accounts in Italy and Germany. The money was released in June 2011 but the investigation is continuing.
"There is a desire to fight all the way against all aspects of illegality and criminality that have insinuated themselves into the world of the economy," Lombardi said of the appointment.
Freyberg, born in 1958, will relinquish other roles, including on the board of temporary employment agency Manpower GmbH, to work five days a week for IOR, the Vatican said. Lombardi had previously said he would work only three days a week at IOR.
Carl Anderson, American head of the worldwide Knights of Columbus charity group and board member of the IOR said Freyberg would "contribute significantly to the IOR's ongoing work of modernisation and transparency".