* Noonan oversaw Ireland’s exit from EU/IMF bailout
* Spending Minister Donohoe favourite to succeed Noonan
* Varadkar gains momentum ahead of June 2 leadership vote (Adds details, quote and polling on leadership race)
By Conor Humphries and Padraic Halpin
DUBLIN, May 18 (Reuters) - Irish Finance Minister Michael Noonan said on Thursday he will step down when a replacement for Prime Minister Enda Kenny is chosen next month, having presided for six years over the dramatic recovery of the Irish economy and banking system.
The announcement came a day after Kenny said he would quit, kicking off a succession contest that was confirmed as a race between two younger ministers after other potential candidates stepped aside and colleagues began to pick sides.
Noonan, 73, oversaw Ireland’s exit from a three-year European Union-International Monetary Fund bailout he inherited and its rebound to post the fastest economic growth of any member of the bloc for the past three years.
“I believe now is a good time for a new Finance Minister to take up office,” said Noonan, who will also retire from politics at the next election. “Ireland is the fastest-growing economy in Europe, the budget is almost balanced and we are on the cusp of full employment.”
Ireland’s unemployment rate has fallen to 6.2 percent from 15.1 percent in 2012 and the government is forecasting a deficit of 0.4 percent of GDP this year.
Kenny’s successor as party leader is set to be elected on June 2 and Noonan may still oversee the flotation of Allied Irish Banks, which he said could happen in the coming weeks, another landmark in the banking sector recovery.
Noonan’s budgetary colleague Paschal Donohoe, 42, the minister for public expenditure, is widely seen as the favourite to replace him, although neither of the leading candidates to replace Kenny has said who they might appoint.
While Noonan and Kenny have been widely praised for their management of the economy, their Fine Gael party lost a quarter of its seats at elections last year as voters complained they were not feeling the recovery.
With the current minority government set to run until the end of next year, Fine Gael hope either Social Protection Minister Leo Varadkar, 38, or Housing Minister Simon Coveney, 44, will give them a boost ahead of the next election.
After one of the other possible runners, education minister Richard Bruton, said he was backing Varadkar, an Irish Times tracking poll showed he led Coveney by a margin of more than two-to-one among the 44 percent of parliamentary party members and councillors who have declared their preference.
Fine Gael lawmakers and councillors make up 75 percent of the vote, with ordinary members accounting for the balance.
Supporters of Varadkar, Ireland’s first openly gay minister, say his straight-talking manner could widen the party’s appeal, an advantage his rival challenged on Thursday.
“I don’t think that a family living in a hotel room this evening is looking for a Taoiseach (prime minister) with an X-factor,” Coveney told reporters at his campaign launch, referring to the housing crisis Kenny’s successor will inherit.
“They’re looking for a Taoiseach that will solve their problems. That’s what I‘m about,” (Editing by Catherine Evans)