By Christian Plumb and Jonathan Stempel

The Philadelphia-based lender was also upgraded by two analysts, and its shares soared, recovering some of their 71 percent decline on Monday. In afternoon trading, the shares were up $2.64, or 113.3 percent, at $4.97. They closed Friday at $8.37.

Perrault was from 1990 to 2007 the chief executive of Chittenden Corp, a Vermont lender that Peoples United Financial Inc of Bridgeport, Connecticut bought last year.

Kirk Walters, Sovereign's chief financial officer and a former colleague of Perrault at Chittenden, will be interim chief executive until Perrault joins Sovereign on Jan 3, 2009. Campanelli became chief executive in Oct 2006, and is leaving to pursue family and business interests, Sovereign said.

"We chose Paul Perrault because of his strong and seasoned banking skills and because of his impressive leadership record, which is punctuated by conservative risk management and strong customer-centric fundamentals," according to a statement by Sovereign directors who searched for Campanelli's replacement.

Spain's Banco Santander SA owns 24.9 percent of Sovereign. The committee included Gonzalo de Las Heras, a Santander executive vice president; Ralph Whitworth, whose investment firm Relational Investors LLC owns 9.8 percent of Sovereign; and Brian Hard, president of Penske Truck Leasing.

Sovereign this year raised $1.9 billion of capital and eliminated its dividend as it tried to reduce risk, including a liquidation of all its collateralized debt obligations.

But investors have worried about the thrift's capital levels, and Sovereign's $622.6 million of Fannie Mae and Freddie Mac preferred stock has lost much of its value. Sovereign on Tuesday said it remains well capitalized and "fundamentally sound."

Joseph Fenech, an analyst at Sandler O'Neill & Partners LP, raised Sovereign to "hold" from "sell," saying Perrault and Walters were "respected managers" and that Walters had "extensive experience in a turnaround-type situation."

He also said the move further distances Sovereign from Campanelli's predecessor Jay Sidhu, who oversaw rapid expansion at the thrift before his Oct 2006 ouster.

Another analyst, Albert Savastano of Fox-Pitt Kelton Cochran Caronia Waller, upgraded Sovereign to "outperform" from "in line," citing its called "severely discounted valuation."

Sovereign has about $79.2 billion of assets, and operates 750 branches in eight northeast and mid-Atlantic states.

It became the largest U.S. savings and loan last week when JPMorgan Chase & Co bought the banking operations of Washington Mutual Inc , then the largest thrift.

(Additional reporting by Savio D'Souza in Bangalore; Editing by Clarence Fernandez and Andre Grenon )