By Amanda Ferguson

BELFAST (Reuters) - Sinn Fein named Michelle O'Neill to succeed Martin McGuinness and lead the Irish nationalist party into Northern Irish elections in March, marking a shift towards a generation not directly involved in decades of conflict.

McGuinness, a former Irish Republican Army (IRA) commander turned peacemaker, bowed out of frontline politics last week, saying illness and Northern Ireland's current political crisis had led him to step down several months earlier than planned.

He was also deputy First Minister of Northern Ireland.

"This is the handover of a primary leadership position from my generation, from Martin's generation, to another generation," Sinn Fein President Gerry Adams told a news conference.

O'Neill was 21 when she began her political career as an advisor at Northern Ireland's devolved assembly in 1998, the year the Good Friday peace agreement was signed, largely ending the bloody period of "The Troubles".

McGuinness was Sinn Fein's chief negotiator in the peace talks between Catholic nationalists seeking a united Ireland and Protestant pro-British unionists wanting to remain in the United Kingdom.

Outgoing Health Minister O'Neill, who turned 40 this month, was the first woman to serve as mayor of her local council area before being elected to the assembly 10 years ago. Her father, a former Sinn Fein councilor, was jailed during the conflict.

Her appointment by the party's leadership also raises the prospect that Sinn Fein could soon be led on both sides of the Irish border by women from a younger generation.

Adams, the party's president for more than 30 years and its leader in the Irish Republic, where it is a growing force, has also said he is preparing to make way, as the former political wing of the IRA broadens its appeal to voters.

Deputy leader Mary Lou McDonald is favorite to succeed him.

O'Neill faces the task of repairing relations with the pro-British Democratic Unionist Party, with whom Sinn Fein led the British province's power-sharing devolved government for a decade before its collapse last week.

The March 2 election will be followed by renegotiations on the terms of power-sharing to avoid a return to direct rule from London as Britain begins talks to leave the European Union.

Sinn Fein has called for Northern Ireland to be given a special designated status within the EU once Britain leaves, after the majority of the province voted against Brexit. The DUP backs making a clean break from the EU.

"The British government is clearly on a collision course with the EU in which our economy and peace agreements are regarded as collateral damage," O'Neill said, after embracing McGuinness whom she described as a political giant.

"We must defend the democratic mandate of the people to remain within the EU."

(Writing by Padraic Halpin; Editing by Angus MacSwan)