Peru's President Pedro Castillo has sworn in Mirtha Vasquez, a left-wing former head of Congress, as prime minister, replacing her predecessor who resigned after two months in the job, as the administration grapples with political instability.

"Today I inform the country that we have accepted the resignation of Prime Minister Guido Bellido Ugarte, whom we thank for his services rendered," said Castillo in a surprise message carried on state television.

Under Peruvian law, the prime minister's resignation automatically triggers that of the entire cabinet.

The move keeps Castillo, a member of a Marxist-Leninist party, on the left of the political spectrum. But it moderates his cabinet overall. Castillo kept center-left Economy Minister Pedro Francke in the role, and named a new energy & mines minister, Eduardo Gonzalez Toro.

Mining is a key industry for Peru, which is the world's second-biggest copper producer after neighbouring Chile. Castillo has said he wants to increase tax revenue from the sector to fund social programs.

Former Prime Minister Guido Bellido was little-known before taking the role, but his brash style rattled the opposition-led Congress as investors fretted about the leftist administration.

Vasquez, the new prime minister, served as head of Congress between 2020 and 2021. She is a lawyer and defended Maxima Acuna, a peasant farmer, in a prominent case against Newmont Mining Corp's Yanacocha gold mine that drew headlines around the world.

Bellido tweeted after the announcement of his resignation that he would fight back and posted a picture of fighting from the movie "Gladiator", a hint at challenges to Castillo ahead.

READ MORE: Peru's new president vows to end corruption and change constitution

Political instability

Like Castillo, Bellido is a member of the Marxist-Leninist Free Peru party, although he was seen as particularly far-left compared with the more pragmatic Castillo.

Vasquez is not a member of Free Peru and belongs to the left-wing Broad Front, which has made environmental concerns a key issue.

Financial markets are widely expected to react to the news on Thursday. Bellido's appointment in late July triggered a widening in bond spreads and weakened the local currency. The sol lost close to 7 percent through last quarter and on Wednesday ended near its record low against the US dollar.

President of Congress Maria del Carmen Alva, a member of right-wing Accion Popular, said on Twitter she supported Castillo's decision to replace Bellido.

In recent weeks, Bellido had talked openly of nationalising Peru's natural gas resources, operated by a consortium led by Argentina's Pluspetrol.

He also defended his labor minister, Iver Maravi, who had been questioned by Congress in a formal hearing for allegedly having been a part of a Maoist insurgency in his youth.

Bellido said he would put the entire cabinet up for a confidence vote if Congress tried to censure Maravi.

Peru has suffered years of political upheaval and a series of corruption scandals saw three different presidents in office in a single week last November.

Seven of the country's previous 10 leaders have either been convicted or are under investigation for graft.

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