* Sony credits Hirai with turnaround of games business
* CEO Stringer to stay in current positions
* Sony to realign business into two core groups
* Stringer says race for successor not over
* Shares down 1 pct in a weak market (Adds comments, background)
By Isabel Reynolds
TOKYO, March 10 (Reuters) - Sony Corp signaled on Thursday that Kazuo Hirai would succeed CEO Howard Stringer after promoting the gaming division chief to the number 2 position at the Japanese consumer electronics giant.
Welsh-born Stringer, 69, told a group of reporters that Hirai was in pole position to take over. Hirai's new role oversees consumer products and services, which make up the bulk of Sony's 7 trillion yen ($85 billion) in sales.
Whoever takes over will face the challenge of coming up with hit products and improving profit margins at a firm struggling to compete with Apple , Samsung Electronics and Nintendo .
The market capitalisation of Sony, inventor of blockbusters from another era such as the Triniton TV and the Walkman cassette, is $35 billion. Samsung by comparison is $130 billion.
"The board and I have talked about succession planning and this is the first step. We have not made a final decision," Stringer said.
"This is an opportunity for the board to watch Hirai-san and judge his performance. There may be other candidates, but he has a leadership position."
Stringer, who serves as Sony chairman, chief executive and president, said he would retain his current positions, at least for the financial year starting in April.
"Hirai is the closest to taking the top job, we can say that for sure," said Nobuo Kurahashi, analyst at Mizuho Investors Securities in Tokyo. "A lot depends on what achievements he manages to rack up, but he is probably the closest to Stringer's thinking."
Sony has been mulling a potential successor for Stringer, who said on Thursday he was happy to stay in the job for another year, but was vague about his plans beyond that. In January he denied he was a candidate for the chairmanship of the BBC.
Stringer has been credited with improving margins by slashing jobs and selling off factories, a job in which many said his status as an outsider was helpful. But investors say they now want to see signs of new growth to help Sony catch up with rivals.
"I wouldn't say investors are exactly satisfied with Sony's performance," said analyst Kurahashi. "It is still lacklustre compared with others in the sector."
Hirai, 50, currently runs the firm's network products and services division, which includes Sony's games business as well as newer ventures such as music and movie streaming services.
"In his current role, Mr. Hirai has successfully led the turnaround of the games business," Sony said in a statement.
Sony said on Thursday it would realign its business into two core groups, one to be led by Hirai, which pulls together the profitable video games group and the television business, which is heading for its seventh year of losses.
The other division, covering business to business areas such as semiconductors, batteries and other key components, will be led by Hiroshi Yoshioka.
"Yoshioka-san has an opportunity to make a lot of money in his group, so the race isn't over," Stringer said, adding that sales of image sensors used in digital cameras, smartphones and tablet PCS were booming.
Sony shares shed 0.9 percent in a broader market down 1.5 percent.
Hirai, who will become executive deputy president on April 1, is a fluent English speaker known for his presentation skills, which were on display at the unveiling of Sony's new handheld games device at a splashy Tokyo ceremony in January.
Operating profit more than doubled in his network products and services division in October-December last year, but was outweighed by losses on TVs, resulting in a fall in Sony's overall profit.
Stringer, formerly an Emmy-award winning TV journalist, was brought in as chairman and CEO of Sony in 2005, and added the role of president in 2009.
"I am happy to be here this year. Don't ask me about next year," he joked when asked about his future. ($1 = 82.74 yen) (Editing by Anshuman Daga)