* Mohamud's 2012 election a new start in shattered Somalia
* President says working to improve financial management
* Resignations of central bank governors rattled donors
* Federal plans hindered by distrust of central government
By Edmund Blair and Aaron Maasho
ADDIS ABABA, Jan 30 (Reuters) - Somalia's president said he wanted the U.N. Security Council to extend a partial lifting of an arms embargo beyond its March expiry because Somali troops need more and better equipment to battle al Qaeda-aligned insurgents.
President Hassan Sheikh Mohamud also said in an interview that he was working to improve public finances management after the resignation of two central bank governors last year rattled Western and other donors.
The election by parliament in 2012 of Mohamud, a 58-year-old ex-academic, eased two decades of political chaos and conflict, first at the hands of feuding warlords and then al Shabaab militants who vow allegiance to al Qaeda.
Since he took office, the battered capital has enjoyed a building boom, some Somalis who fled have returned and, in a sign of greater international confidence, the U.N. Security Council partially rescinded an embargo, letting Mogadishu import light arms for its army for one year until March 2014.
Yet huge challenges remain for Mohamud's government as it struggles to extend federal rule in a fractured nation and rebuild institutions to run a modern state, while still battling Islamist rebels who control swathes of countryside.
"Every Somali and our international partners have to understand: as far as there is territory that is not controlled by the government, the phenomenon of al Shabaab, al Qaeda and terrorists will always be there," the president said in Addis Ababa, speaking during a trip for an African Union summit.
He said that to extend its control, the national army needs improved equipment and training but this would be denied if the full arms embargo was reimposed.
Some diplomats had voiced concerns last year about even a partial lifting, saying the Horn of Africa state was already awash with guns and these could end up in the wrong hands.
But Mohamud said his government had met demands for monitoring any weapons brought in. "I think we have all the right now to request the U.N. Security Council extend that (suspension) and ultimately lift the embargo."
Mohamud said Somali troops would gain strength by fighting alongside the newly expanded African peacekeeping force, AMISOM, which has driven al Shabaab out of major urban areas.
Asked when a widely expected new offensive against al Shabaab would start, Mohamud only said: "It is not far away."
As well as seeking to establish security in a nation that became an epitome of a "failed state", the president has the daunting task of rebuilding institutions such as the central bank essential to bringing more order to the economy and managing state funds. It has been an uneasy process.
A report by U.N. experts last year said they had evidence of graft in the way the central bank was run, prompting the then-governor to resign, although he denied the charges.
A second governor quit days after taking office, a decision diplomats said was driven by her concerns about graft. That unsettled donors further.
Mohamud dismissed such worries, saying his government was working closely with international partners on reforming public financial management, but that it was a difficult job in a nation where any past system had collapsed.
STARTING FROM SCRATCH
"We started everything from scratch and I think today we have institutions that started working," he said, but more action was needed. "We have our international partners fully engaged supporting those institutions in that reform."
He cited moves to set up a joint financial management advisory authority, with Somali officials and representatives from institutions such as the World Bank and International Monetary Fund. A new central bank board would also be picked.
An interim central bank governor, whose 90-day term runs out in about a month, was not expected to have his assignment extended but could apply for the permanent post, Mohamud said.
Another challenge facing Mohamud is implementing federal rule in a nation where trust in central government is in short supply. One region, Somaliland, declared independence two decades ago, while ties with another, Puntland, are strained.
But the president said he was working to rebuild trust.
The election of a new president in Puntland, replacing a man who broke relations with Mogadishu after accusing the central government of failing to share power, was creating "momentum for coming closer", Mohamud said.
He said rebuilding ties with Somaliland required more negotiations, but that three rounds of talks since 2012 in Turkey between officials from Somaliland and the federal government was a sign of modest progress.
"There were times when even sitting together was not possible," Mohamud said. (Editing by Mohammad Zargham)
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