LTCB president Katsunobu Ohnogi told a parliamentary banking panel on Monday that the notional amount of LTCB's derivatives trade was around 40 trillion yen ($287 billion).

He echoed government warnings, saying that if the bank failed its impact on financial markets could be enormous.

Bankers said, however, they saw little problem in settling LTCB's outstanding derivatives, let alone them causing global turmoil in financial markets.

"It's disappointing to see that the government, even the Bank of Japan (BOJ), has to sell an unrealistic scenario to the public," a senior fund manager at a major Japanese bank said.

The government has insisted LTCB be saved through a merger with Sumitomo Trust & Banking Co Ltd, facilitation of which would likely requiregovernment use of public funds, which is the part the government is having difficulty persuading many critics to accept.

Finance minister Kiichi Miyazawa said on Thursday that if LTCB failed it could drive all Japanese banks out of the financial derivatives markets.

On Tuesday, Miyazawa said LTCB's derivatives positions, unless handled correctly, could in the worst case trigger a global depression.

BOJ governor Masaru Hayami said last week: "One could easily imagine that a sudden failure of a major bank such as LTCB would cause a very big shock, not only domestically but also overseas." He added that it would be better for a failing major bank to be merged or purchased in the market, rather than for a "bridge bank" to be used.

The government has proposed a bridge bank system to wind up raised banks while keeping healthy borrowers afloat.

The first step in the process would be the appointment of a financial administrator, whose initial tasks would include examining the failed bank's Financial assetsand liabilities, and halting its operations. This would mean defaulting on immediate international obligations.

But bankers argued that even if LTCB went bankrupt and the bridge bank plan took effect, collateral usually demanded by counterparties in derivatives deals would still be legally effective and collectible.

"Participants in derivatives usually set aside collateral if their positions are making book losses, and that collateral must be high on the list of assets collectible by counterparties of LTCB," said a fund manager at a major Japanese bank. Opposition Democrats have been saying that a default in derivative deals would not happen if a failed bank were nationalised, because it would remain as a corporate entity, which should ease any financial panic.

Bill Seidman, a key player in resolving the US savings-and-loan crisis and an occasional adviser to the Japanese government, on Monday scoffed at assertions by the government and the BOJ that an LTCB failure would wreak global financialhavoc.

In the US cases, "we performed on all the derivative contracts because we thought it was essential to the economy, and the cost was borne by the government," he said.

A former ministry of finance official told Reuters on Tuesday: "I don't see any problem in settling LTCB's derivative positions. We could do that without causing much inconvenience to anybody."

A European bank trader said: "We saw that some Japanese banks had agreed to cancel interest-rate swap deals with LTCB last week," which meant that the bank's outstanding derivatives were already declining.