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 sheds major assets.

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

The departure of CEO Mike Zafirovski had been expected for some time since 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, although the company will seek court approval for its monitor, Ernst & Young Inc., to take a bigger role in overseeing its business and ask for U.S. court approval to appoint a principal officer, it said.

Zafirovski joined Nortel in late 2005 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.

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.

SECOND QUARTER LOSS BALLOONS

Nortel said it lost $274 million, or 55 cents a share, in the second quarter. That was worse than the loss of $113 million, or 23 cents a share, in the year-before quarter.

Nortel said the quarter's 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 Janet Guttsman)

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