Nortel Networks said on Monday its chief executive will step down immediately and its board will shrink from nine directors to three as the bankrupt telecom equipment maker works to sell off all of its major assets.

Nortel expects to get bids setting minimum prices for all of its divisions by the end of September, moving it closer to completing its own dismantling, CEO Mike Zafirovski told Reuters.

Discussions are advancing. They're promising and there's a confidence that we should be able to get 'stalking-horse' agreements for all parts of the business ... before this quarter's over, said Zafirovski, a former Motorola executive recruited in late 2005 to arrest the Toronto-based company's steady decline since its tech-boom heyday.

Nortel, once North America's biggest maker of telephone gear, also said its quarterly loss ballooned from a year earlier due to big reorganization costs and plunging sales, which it blamed on the weak economy.

Zafirovski's departure seemed inevitable after the once high-flying technology company filed for court protection from creditors at the start of this year.

There is very little for Mike to do -- for any CEO to do -- at Nortel at this time in terms of strategy or operations or even cost-cutting or sales, said Duncan Stewart, analyst at DSAM Consulting in Toronto.

This is a company that is being wound down with assets being sold off.

The three remaining directors are John MacNaughton, Jalynn Bennett, and David Richardson, who will serve as chairman, Toronto-based Nortel said.

A group of executives including Chief Restructuring Officer Pavi Binning and Chief Strategy Officer George Riedel will remain to manage the company.

No replacement was announced for Zafirovski. The company said it would seek court approval for its monitor, Ernst & Young Inc., to take a bigger role in overseeing its business. It will also ask for U.S. court approval to appoint a principal officer.

Zafirovski joined Nortel after holding the post of president and chief operating officer at Motorola Inc. Many investors and analysts had hoped he could accomplish what no other executive in the past decade could: turn Nortel into a consistently profitable and stable company.

Instead, Nortel filed for protection from creditors in January, blaming the recession for derailing its turnaround.

DOOR OPEN TO RIM

It has since started selling its major business lines, including a $1.13 billion deal to sell wireless assets to Sweden's Ericsson.

Nortel's enterprise unit is also up for sale and has received a $475 million stalking horse bid from Avaya Inc, though higher offers may emerge.

Nortel will still be left with about 3,000 patents in its portfolio, including the next-generation wireless LTE patents which have attracted the interest of BlackBerry maker Research In Motion.

Although a dispute over the bidding process for Nortel's assets has cooled relations and halted talks between the two companies, the situation could change, Zafirovski said.

The door is wide open to have discussions with RIM, he said. We agree with their statement that our patent portfolio is a treasure.

Nortel's loss widened to $274 million, or 55 cents a share, in the second quarter from a loss of $113 million, or 23 cents, in the year-before quarter.

The latest loss included reorganization costs of $130 million.

Revenue fell 25 percent to $1.97 billion, primarily a result of the continuing economic downturn and the uncertainty created by the creditor protection proceedings, Nortel said.

Every one of its main business segments posted revenue declines of at least 20 percent year over year, Nortel said.

(Reporting by Wojtek Dabrowski; editing by Frank McGurty)

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