Relevance of research topic. An institutional mechanism aimed at progressive technical and technological modernization of the production sector as the basis of the national economy is an important component of the transition of Ukrainian industry to an innovative type of development. Formulation of the problem. At the same time, the growth in the level of depreciation of the fixed assets of Ukraine's industry already accounts for two thirds of their initial value, which indicates the gaps in the structure and links between the components of the existing institutional mechanism and leads to its low efficiency. Analysis of recent research and publications. The questions of the essence of the institutional mechanism of economic development and industrial modernization were studied in the works of D. North, C. Polanyi, J. Hodgson, I. Averina, V. Heyets, A. Grytsenko, S. Istomin, G. Kleiner, N. Lebedeva, A. Plotnikova, S. Yashchenko, etc. Selection of unexplored parts of the general problem. Despite the acuteness of the problem of technological renewal of the industrial sector and increase of its competitiveness by means of transition to the innovative type of development, the aspect of industrial modernization has not been studied enough. Setting the task, the purpose of the study. The purpose of the research is to define the essence, structure and directions of development of the institutional mechanism of industrial modernization for overcoming the stagnation and increase the competitiveness of domestic industrial production. Method or methodology for conducting research. Structural-logic, specifically economic methods, method of scientific abstraction, institutional analysis, economic and statistical and expert methods are used in the research. Presentation of the main material (results of work). Institutional mechanism of industrial modernization is a multi-level formation with a large number of vertical and horizontal links between institutions, in which the necessary flows of knowledge, technology and capital are formed with the help of specific instruments, the effectiveness of which is determined by the quality of institutions. Analysis of the state of industrial modernization has revealed a significant share of outdated technologies in the basic industries, a significant outflow of foreign direct investments and insufficient capital investments, which is associated with imperfections in the existing institutional mechanism. They should be managed through a system of monitoring of state of industrial modernization and re-institutionalization of linkages between the state and industrial stakeholders as an important tasks of industrial policy. The field of application results. The results of the study can be used in the improvement of the legal and regulatory framework for industrial development, in the development of programs and action plans of the government to overcome the crisis in the Ukrainian economy. Conclusions according to the article. The research has revealed the essence of the institutional mechanism for modernization of the industrial sector, defined its structure and analyzed its components – institutions, institutes, communication channels and instruments of stimulation. It was determined that its development should be regulated by the state through monitoring of the state of industrial modernization, revision of legislation, selection of effective instruments of industrial policy, reinstitutionalization of communications and formation partnership within the framework “state - industry - science”.