UPDATE 1-Navistar names new board members, avoids proxy fight

* Mark Rachesky, Icahn nominee named to board

* Third nominee to be named later

* Investors agree not to stage proxy fight at 2013 meeting

* Shares up 5 pct

(Adds details on agreement, background, byline, stock move)

By Nick Zieminski

Oct 8 (Reuters) - Navistar International Corp agreed to appoint three new members to its board, avoiding a proxy fight with activist investors Carl Icahn and Mark Rachesky, who have demanded changes at the U.S. truck and engine maker.

Navistar shares gained 5 percent to $22.28 in early trading on Monday following the news.

The company said Vincent Intrieri, an Icahn nominee, and Rachesky had been named to the board. A third nominee, agreed on by Rachesky and Icahn, will be named later. All three nominees will replace current board members, keeping the board's size steady at 10 members.

Icahn and Rachesky have agreed not to stage a proxy contest at the 2013 annual meeting, the company said. Navistar typically holds its shareholder meetings in February.

Icahn and Rachesky, a former Icahn adviser, each own just under 15 percent of Navistar, tying them as its second-largest investors. Navistar in June adopted a poison pill anti-takeover defense triggered by a 15 percent holding.

Icahn had criticized the company's product strategy and its appointment of a new CEO, Lewis Campbell, and had demanded representation on the board. Rachesky's MHR Fund Management LLC had also said it wanted to discuss the company's operations.

Last month, Navistar accused Icahn of "threats, attacks and disruptions" after the billionaire investor said shareholders should have been consulted about the hiring of Campbell.

Navistar's largest shareholder is Franklin Resources Inc , which has a 16.3 percent stake amassed before the company adopted its poison-pill defense.

Navistar has begun cutting costs and may sell assets under Campbell, who replaced ousted CEO Dan Ustian in August. The company has said it is focused on righting its North American business, which stumbled over the past year as it failed to win U.S. regulatory approval for a new diesel engine technology.

Analysts say Navistar may sell its Monaco Coach recreational vehicle arm, which it bought out of bankruptcy in 2009, and its military truck unit.

With its new diesel technology, Navistar was trying to limit emissions of the greenhouse gas nitrogen oxide without using the additive urea.

Navistar has abandoned that effort, saying it will instead begin selling trucks with engines from Cummins Inc early next year.

(Additional reporting by A. Ananthalakshmi in Bangalore; Editing by Saumyadeb Chakrabarty and John Wallace)

((nick.zieminski@thomsonreuters.com)(+1 646.223.6162)(Reuters Messaging: nick.zieminski.thomsonreuters.com@reuters.net))