(Corrects first paragraph to say Chavez has been in power 14 years not 12)
LONDON, Dec 10 (Reuters) - Venezuelan dollar bonds rallied sharply on Monday and debt insurance costs tumbled after the nomination of a successor by ailing President Hugo Chavez raised the prospect of his departure from office after 14 years in power.
Venezuelan yield spreads over U.S. Treasuries fell 56 basis points to 758 bps, the narrowest since August 2008, on JP Morgan's EMBI Global index. The most-traded 2027 dollar bond jumped 2.3 cents on the dollar to 101.092.
Chavez stunned Venezuela at the weekend with an announcement he had suffered a setback in his long-term battle with cancer and named Vice President and Foreign Minister Nicolas Maduro to take over, should he become incapacitated.
"This is the first time Chavez has been forthcoming on any kind of succession arrangement. With that, expectations are mounting that the Chavez ... rule will be coming to an end in the foreseeable future," said Stuart Culverhouse, head of research at Exotix brokerage in London.
Venezuela's five-year credit default swaps fell to 610 basis points from the Friday close of 642, according to Markit data, having fallen by over 80 bps since the end of November, when Chavez returned to Cuba for cancer-linked treatment.
Markets expect that if a new election were needed, the opposition, led by pro-business Henrique Capriles, could be in its best position to win since Chavez took power in 1999.
Despite his ill-health, Chavez was re-elected earlier this year, beating Capriles. Culverhouse said a Chavez departure would not necessarily lead to a change of government although the longer-term risk was one of political instability as a transition is made from Chavez's highly centralised rule.
"We'll see a near-term rally while the news is digested but it doesn't mean it's going to last," Culverhouse said. (Reporting by Sujata Rao and Alice Baghdjian, editing by Mike Peacock)