The shift, which caught Washington by surprise, comes at a critical moment for the Clinton administration as it tries to win support for its health-care reform. Mr Clinton may also want to reorganise now to have a better chance of limiting Democratic losses in elections in November.
Mr McLarty, 46, an Arkansas businessman and a friend of Mr Clinton for 40 years, becomes his senior adviser, but his influence will be much reduced. Mr Panetta, formerly a Californian Congressman, is expected to be a more forceful organiser, and has better contacts in Congress.
Mr Clinton is also sending David Gergen, the former Republican who became a senior adviser last year, from the White House to the State Department to improve the way foreign policy is sold at home and abroad. Although this move is nominally at his own request, Mr Gergen was unpopular with other members of Mr Clinton's staff.
A reshuffle in Mr Clinton's administration was expected, not in the White House but at the State Department with the replacement of the Secretary of State, Warren Christopher. This still may happen, but Mr Clinton will not want to give an impression of panic by too radical a shake-up.
Mr McLarty attended the same kindergarten as Mr Clinton in Arkansas and became chairman of Arkla, the Arkansas natural gas company, which is at the centre of business and politics in the state. However, in his 18 months as chief-of-staff he showed little talent for foreseeing political dangers. This was in part because Mr Clinton likes to act as his own chief-of-staff and prefers ad hoc organisation, although that has often led to incoherence. He has gone out of his way to find Mr McLarty and Mr Gergen senior jobs so their replacement does not look like a repudiation of the administration's policy.
LITTLE ROCK, Arkansas - Mr Clinton will seek to have a sexual harassment lawsuit dismissed until he leaves office, according to papers filed by his lawyer, AFP reports. Mr Clinton denies allegations by Paula Jones that he made sexual advances to her when he was governor of Arkansas.Reuse content