Time Warner Inc on Thursday named Google executive Tim Armstrong to lead AOL, in what was seen as a bold move to reverse the fortunes of the struggling Internet unit in preparation for a spinoff.

The hire was a welcome surprise to Wall Street analysts, who see Armstrong as a respected executive who had overseen Google's Americas operations. He is best known for his work in developing Google's online advertising business and was widely touted last year as a CEO candidate for Yahoo Inc.

Tim is the right executive to move AOL into the next phase of its evolution, Time Warner Chief Executive Jeff Bewkes said in a statement announcing Armstrong's appointment as AOL chairman and chief executive.

He'll also be helpful in helping Time Warner determine the optimal structure for AOL.

Armstrong replaces Randy Falco, an ex-NBC executive, who will leave the company after a transition period, as will AOL Chief Operating Officer Ron Grant, Time Warner said. Falco and Grant were appointed in November 2006.

Bewkes has publicly said he is looking for the best way to resolve the future of AOL at Time Warner, including either a spin-off or merger with a partner such as Yahoo or Microsoft Corp's MSN.

Pali Research analyst Richard Greenfield, who had called for the replacement of Falco and Grant, said news of Armstrong's appointment was a huge positive and major surprise for investors.

While we've been focused on the termination of Falco and Grant, we never expected that Time Warner would be able to get an executive of the caliber of Tim Armstrong to a struggling AOL, said Greenfield.

In a client note earlier on Thursday, he argued that AOL's earnings had declined 50 percent under Falco's watch, based on projections for 2009 compared with 2006 results.

Time Warner has focused on developing AOL's advertising business in recent years, but Armstrong's remit will be on getting the business ready for a complete spinoff.

Bewkes and Falco previously split AOL into two broad units, with one focused on audience and advertising, while the other on a shrinking legacy dial-up Internet access business.

But while investors had welcomed the strategy and it showed initial signs of growth, that has slowed in the last year along with the wider advertising slowdown.

You've got structural business model issues (at AOL) and you've got a poorly run company, said Ross Sandler, an analyst at RBC Capital Markets. He can bring in hopefully some much needed fresh blood in terms of managerial experience.

Time Warner shares were largely unchanged in after-hours trading, after rising 5.18 percent to $8.32 in New York Stock Exchange.

(Additional reporting by Alexei Oreskovic in San Francisco; Editing by Tiffany Wu and Andre Grenon)