NEW YORK (Reuters) - Sergio Marchionne, an independent member of Fiat's board and the chairman of Swiss chemicals group Lonza, is the front runner to take over as Fiat chief executive, a source familiar with the situation said Monday.

Fiat's board is expected to meet Tuesday to pick its new CEO -- its fifth in two years -- after Giuseppe Morchio resigned late on Sunday in protest over Ferrari chief Luca di Montezemolo being given the post of Fiat chairman, which was left vacant after Umberto Agnelli died last week.

"Marchionne is the most likely choice," the source said.

Shares of Fiat fell more than three percent on Monday, with more than its daily average volume trading hands in less than an hour. Fiat was down 1.8 percent at 5.69 in morning trading.

The turmoil of the last few days threw Fiat's future into question just as a turnaround plan drawn up by Morchio and Agnelli was starting to bear fruit. Some analysts warned that even a top-notch manager would need at least three months to get to know Italy's largest industrial group and its recovery would slow down as a result.

"Fiat doesn't have a minute to waste but now middle management are left without a leader once again, which is going to slow everything down," said one auto sector analyst.

Morchio and Agnelli took the helm at Fiat in February 2003, putting an end to months of revolving-door management as heads rolled for letting the 105-year-old group tumble deep into loss.

They quickly put together a plan to sell non-core assets and share more costs across Fiat's units and with partner General Motors, which owns 10 percent of car arm Fiat Auto.

Morchio, the first outsider to be given free rein at the family firm, also swept lifetime employees out of top posts and hired a group of foreign managers to breathe new life into Fiat.

One trader said investors worried other managers would follow Morchio out the door but Montezemolo told reporters in Rome that "the team that will carry through the restructuring plan is in place and it is strong."

Media said Morchio had wanted the chairman's post but instead the Agnelli family, which controls Fiat with a 30 percent stake, picked the flamboyant chief of Fiat's sportscar unit Ferrari and long-time family friend Luca di Montezemolo.

Montezemolo and Morchio are forceful characters who demand things are done their way. As one source in Fiat's hometown of Turin put it, they were "too big to share the same stage."

Fiat declined to comment on the Marchionne rumors.

On Monday, Italy frothed with speculation as to who would take over from Morchio, who cut a figure at Fiat as he marched through the corridors and factories with a book of numbers under his arm, searching for costs to cut and investments to be made.

Among the names touted by the media were Paolo Monferino, head of Fiat's tractor and bulldozer arm CNH Global, or former Ford Europe CEO Martin Leach, who recently took control at Fiat's luxury Maserati brand.

Others included the CEO of road operator Autostrade Vito Gamberale, the head of UniCredito bank Alessandro Profumo and former Fiat CEO and current Mediobanca chief Gabriele Galateri.

Morchio's replacement will have to get down to business fast as a deadline looms for Fiat to settle a spat with GM over whether the U.S. giant could have to buy the rest of Fiat Auto and as talks with banks owed three billion euros bubble away.

"We will tomorrow, without delay, name a new chief executive of Fiat," Montezemolo told reporters in Rome. Fiat's board is due to meet Tuesday.

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Some Fiat watchers had wondered if the Agnellis, once seen as Italy's uncrowned royal family, would lose their tie with Fiat after Umberto's death -- 15 months after the death of his brother, the flamboyant Fiat patriarch Gianni Agnelli.

Instead they named two more family members to the board including Umberto's son Andrea and promoted Gianni's 28-year-old grandson and heir John Elkann to the post of vice-chairman.

"The Agnellis are not finished....We have never thought of abdicating our role and our responsibilities," one of Umberto's four sisters Maria Sole told la Repubblica on Monday.