NEW YORK (Reuters) - MBIA Inc ousted chief executive Gary Dunton and replaced him with former CEO Joseph (Jay) Brown as the bond insurer scrambles to overcome mortgage-related losses, maintain a top credit rating and restore market confidence.

MBIA said Dunton, 52, resigned on Saturday, effective immediately.

Its stock rose about one percent in early trading.

Shares of the Armonk, New York, company have plunged 83 percent in the past year, and the company has had to sell equity to bolster its finances weakened by exposure to mortgage market losses. MBIA also is battling with high-profile investors betting against its shares.

Brown, 59, in a statement issued yesterday said he had spoken to New York State Insurance Superintendent Eric Dinallo, who is trying to broker a solution to the woes of MBIA and its rivals.

"I believe we can look forward to improved dialogue with the department," Brown said in a statement.

In an interview with CNBC, Brown said he was optimistic that a deal involving New York state could happen in the next two weeks.

Between 1999 and 2004, Brown ran MBIA and its main unit, MBIA Insurance Corp. He joined the firm as a director in 1986 and retired last May.

MBIA, known in industry parlance as a "monoline" insurer, strayed from its core business of guaranteeing municipal bonds into the more lucrative but riskier activity of backing structured mortgage securities. That strategy fuelled growth in the past decade but led to rising losses during the past year as housing sales sputtered and credit markets seized up.

"In my view, the structure of the financial guaranty industry needs redesign," Brown said in an open letter to MBIA shareholders yesterday.

The bond insurer business model also must change, he wrote, to avoid the kind of capital-raising difficulties faced by MBIA and rivals such as Ambac Financial Group Inc.

New York regulators are trying to orchestrate a rescue so that bond insurers can maintain their triple-A ratings. There also has been talk of splitting up insurers to separate relatively safe municipal bond activities from the woes associated with the mortgage business.

Last Wednesday, MBIA completed the sale of $1.1 billion of stock at $12.15 a share. The stock closed New York Stock Exchange trading Friday at $12.24 a share and was up 13 cents at $12.37 in trading yesterday.

Prior to joining MBIA, Brown was CEO of Talegen Holdings Inc, an insurance holding company, and CEO of Fireman's Fund Insurance Co. Brown served on Safeco Corp's board since 2001 and was named non-executive chairman in January 2006. He will step down from that chairmanship in May.