Osborne's star rises along with Britain's economy
* Economic recovery inflates Osborne's political capital
* Finance minister inherited UK's biggest peacetime deficit
* Cameron's confidant pushed through unpopular spending cuts
* Osborne re-enters political fray after lying low
* Places economic recovery at heart of 2015 election
LONDON, Oct 21 (Reuters) - With no apparent end in sight to Britain's economic stagnation and his 2012 budget slated as a shambles, George Osborne spent much of last year holed up behind the cream limestone walls of his finance ministry.
The unexpectedly strong growth of the $2.5 trillion economy has put an end to his seclusion: Britain's second most powerful politician has re-entered the fray, presenting himself as the guardian of economic recovery and urging voters to re-elect his Conservative party in 2015 "to finish the job".
"It's true that last year I retreated a bit ... into the Treasury," Osborne, Prime Minister David Cameron's closest ally, told activists from his ruling Conservative party this month in Manchester, using the British term for the finance ministry.
"I got into that situation which I think can happen to politicians, which is I'm just going to get on with the job. If people don't want to hear an explanation of what I'm doing then so be it."
Once written off by critics at home and abroad as a posh incompetent blindly fixated on economic austerity at the cost of growth, Osborne's star -- along with that of the British economy -- is on the up.
From consumer spending to new manufacturing orders, data shows Britain has shaken off the stagnation that dogged its economy after the deepest recession since World War Two.
The International Monetary Fund (IMF) this month raised its British growth forecast sharply to 1.4 percent for 2013, one of the strongest growth rates in the developed world albeit way below the 2.5 percent average post-war rate for Britain.
Interest rates are at a historic low, house prices are rising, unemployment is falling, and the budget deficit is down by a third since 2010 when Cameron's government took office with the Liberal Democrats as a junior partner.
For Osborne, the youngest Chancellor of the Exchequer, or finance minister, in more than 100 years when he took the job in 2010 at just 38, it is a remarkable turnaround.
Earlier this year, some lawmakers in his own party said the 42-year-old had become an electoral liability. Today, many of those same lawmakers are speculating about his chances of succeeding Cameron as prime minister.
His allies, nicknamed 'Osbornites', have recently been promoted in a ministerial reshuffle, and Britain's right-leaning press is running upbeat headlines about the economy.
Not everything is rosy: the national debt remains huge at 75 pct of GDP, some economists say Osborne's plans to stimulate the housing market risk creating a bubble and his Labour opponents say he and Cameron are presiding over a cost of living crisis.
With inflation outstripping stagnant wages and utility and transport companies sharply increasing bills, it is a charge that resonates with many voters who responded positively to a Labour promise to freeze energy bills if elected.
Yet Osborne, who is fascinated by U.S. politics and fond of quoting his hero, former U.S. president Lyndon B. Johnson, has the air of a man who thinks he has survived an ordeal.
"Last year and at the beginning of this year was the moment when we were under maximum pressure to do a U-turn and to come off the (economic) course we had set," he told activists at the Conservative party's annual conference this month.
"We resisted that. We held our nerve."
His remit runs much wider than the world's sixth-largest economy and has not been trouble free.
From negotiations with China on politically sensitive investment in Britain's nuclear industry and explaining the loss of a parliamentary vote on military action in Syria to crafting government policy on gay marriage or welfare reform, Osborne is Cameron's main ally.
"George Osborne is the prime minister's closest adviser bar none," said a source in Cameron's office. "On everything."
Godfathers to each other's children and close friends, both have aristocratic roots and attended Oxford University. In 2005, Osborne ran Cameron's successful campaign to become Conservative party leader; the two have been politically inseparable since.
Though a strong speaker, Osborne doesn't have Cameron's easy manner with the media and can come across awkwardly at times. This, plus his close association with austerity and perceived aloofness within the party, would make it hard for him to take over from Cameron as leader.
Married with two children, Osborne grew up in London, unlike many in his party who hail from rural England. That, say people who know him, has given a man who describes himself as a social and economic free market liberal a more cosmopolitan outlook, for example on gay marriage, than many in his party.
A fan of the late British Conservative prime minister Margaret Thatcher -- he cried at her funeral earlier this year -- he also admires former Labour prime minister Tony Blair, going so far as to call him "the master".
Osborne makes no secret of the fact that he wants the modern Conservative party to copy what he describes as Blair's centre ground politics he says were aimed at combining a strong market economy with decent public services.
As finance minister, Osborne's focus has been on cutting Britain's budget deficit and its almost 1.5 trillion pound ($2.43 trillion) national debt.
His policy mix: shrinking government spending, reducing top and bottom rate tax, slowing the rate at which Britain's welfare budget grows, and stimulating the housing market.
The opposition Labour party, which has seen its opinion poll lead heavily eroded in recent months, has accused Osborne of cutting spending too deeply too fast, saying he is investing too little in infrastructure.
Week after week, Ed Miliband, Labour's leader, stood up in Britain's parliament to denounce Osborne, arguing his policies were killing any chance of a recovery.
In February this year, Osborne's political fortunes hit a low point when Moody's stripped Britain of its prized AAA credit rating for the first time since 1978, saying it thought growth would remain sluggish for years.
Two months later, Fitch followed suit and the IMF's chief economist suggested Osborne was "playing with fire" by pressing ahead with austerity after the fund downgraded its growth forecasts for Britain.
The IMF's doubling of its growth forecast for Britain this year to 1.4 percent, the sharpest upgrade for any G7 leading economy, has given Osborne the last laugh.
Osborne, who says he and his party have no sense of triumphalism given outstanding problems, hopes the economic credibility he believes he has accrued will give his party a majority in 2015, something it failed to achieve in 2010.
Opinion polls show voters do trust him more on the economy than Labour despite the financial pain they continue to endure and Labour's overall poll lead is showing signs of crumbling.
A poll this month by polling firm YouGov showed 38 percent of voters said the Conservatives would do a better job of managing the economy against 23 percent for Labour.
But the preferences were almost reversed - 34 to 25 percent in Labour's favour - when the question was about which party would be better for raising living standards, an issue Labour is putting at the heart of its early election campaigning.
Osborne says there's no room for complacency.
"We have to deal with our debts and see our plan through," he told delegates at his party conference. "This battle to turn Britain around - it is not even close to being over. We are going to finish what we have started."