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By William James and Kylie MacLellan
LONDON (Reuters) - New Prime Minister Theresa May ruthlessly overhauled the British cabinet on Thursday, sacking a raft of ministers, promoting loyalists and putting supporters of Britain's exit from the European Union firmly in charge of negotiating its terms.
A day after replacing David Cameron, May told the head of the European Commission that Britain needed time to determine its negotiating strategy, brushing off pressure from European leaders to swiftly launch the two-year official exit process.
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Her most contentious appointment is Foreign Secretary Boris Johnson, accused by his French counterpart Jean-Marc Ayrault on Thursday of lying to Britons in the run-up to last month's shock referendum vote to leave the 28-nation EU.
Johnson, who during the campaign compared the bloc's aims to those of Hitler and Napoleon, told reporters that despite Brexit, Britain could play an even greater role in Europe.
"There's a massive difference between leaving the EU and our relations with Europe, which if anything I think are going to be intensified," he told reporters.
Three weeks after the referendum, May's new government faces the formidably complex task of extricating Britain from the EU - itself reeling from the shock of Brexit - while trying to protect the economy from feared disruption to confidence, trade and investment.
The Bank of England kept interest rates unchanged on Thursday, wrong-footing many investors who had expected the first cut in more than seven years. But it said it was likely to deliver a stimulus in three weeks' time to support the economy, once it has assessed the fallout from the June 23 vote.
The pound rose on the news but is still down 11 percent since the night of the referendum.
New finance minister Philip Hammond signaled he would take a less aggressive approach to cutting the budget deficit than his predecessor George Osborne, who was dumped on Wednesday, just hours after May stepped into Number 10 Downing Street.
"Markets do need signals of reassurance, they need to know that we will do whatever is necessary to keep the economy on track," Hammond said.
"Of course we've got to reduce the deficit further but looking at how and when and at what pace we do that ... is something that we now need to consider in the light of the new circumstances that the economy is facing."
Veteran right-wingers David Davis and Liam Fox - both ardent campaigners for Brexit - have been named as cabinet secretary for exiting the EU and head of a new international trade department, key positions in the arduous negotiations ahead.
Along with Johnson's appointment, that means prominent advocates of Brexit will have the main roles negotiating its terms, forcing them to take responsibility for delivering on campaign promises to maintain access to Europe's free trade area while imposing controls on immigration.
May gave the farming ministry to Andrea Leadsom, another Brexit campaigner who had run against her for the Conservative party leadership. Leadsom will now face the task of determining how farmers will replace lost EU agriculture subsidy income.
Britons chose Brexit despite a barrage of warnings that severing EU ties would create huge uncertainty and plunge the economy into recession. The winning 'Leave' campaign dismissed what it called 'Project Fear', saying Britain would prosper if it regained independence from Brussels.
One of the first economic indicators to capture the post-referendum mood showed on Thursday that British consumer confidence fell sharply after the vote. The Thomson Reuters/Ipsos Primary Consumer Sentiment Index fell to 49.4 in July from last month's 51.2.
"It's too early for most people to experience any direct economic impacts from Brexit, but fear for the future is clearly being felt by many," said Bobby Duffy, managing director of public affairs at Ipsos MORI.
May's swift dismissal of finance minister Osborne was a firm break with Cameron's administration. Osborne was the architect of austerity policies and a leading voice among those who had warned that leaving the EU would spell economic doom.
On Thursday she followed up by removing the justice, education, culture and cabinet office ministers, an unusually high toll of sackings for a British cabinet shakeup.
Work and pensions minister Stephen Crabb, who had also sought the prime minister's job, resigned citing family reasons, days after hitting front pages for allegedly sending flirtatious messages to a young woman despite being married. The Northern Ireland minister also quit.
"Brexiteers" Chris Grayling and Priti Patel won cabinet jobs in a sign of May's intent to unite the divided governing body and show that, despite having favored the losing Remain side, she will implement the instructions of the electorate.
EU countries have pressed Britain to move quickly to initiate the two-year divorce process to lift uncertainty. But Cameron's government drew up no contingency plans for the prospect that he could lose his referendum campaign to stay in.
May's spokeswoman said she had spoken by phone to European Commission head Jean-Claude Juncker, explaining that Britain would not be triggering the exit process immediately.
"The prime minister explained that we would need some time to prepare for the negotiations," the spokeswoman said.
She also spoke to U.S. President Barack Obama, underlining Britain's commitment to sustaining the countries' "special relationship" and partnership on intelligence-sharing.
Obama had urged British voters before the referendum to stay in the EU, for which he was criticized during the campaign by Johnson, who suggested the U.S. president had inherited anti-British views from his Kenyan father.
That was just one of many undiplomatic comments over Johnson's career that made his appointment as foreign secretary the biggest surprise of the cabinet shakeup.
He was the figurehead of the successful Leave campaign, but since the referendum had suffered widespread criticism and ridicule for failing to present a clear Brexit plan and swiftly dropped out of the leadership race won by May.
With his unkempt blonde hair, bumbling humor and penchant for gaffes, he is a colorful but contentious choice for conducting sensitive diplomacy with world leaders.
"Clearly British humor has no borders," tweeted former Belgian Prime Minister Guy Verhofstadt.
French Foreign Minister Ayrault was blunt: "I am not at all worried about Boris Johnson, but ... during the campaign he lied a lot to the British people and now it is he who has his back against the wall."
Asked about the remark, Johnson shrugged it off: "I have to say that the gentleman you mentioned, the French foreign minister, in fact has sent me a charming letter just a couple of hours ago saying how much he looked forward to working together and to deepening Anglo-French cooperation."
(Additional reporting by Kate Holton, Costas Pitas, William Schomberg, David Milliken, Andy Bruce, Karin Strohecker, Michael Holden, Paul Sandle and Ana Nicolaci da Costa; Writing by Mark Trevelyan; editing by Peter Graff)