The senior debt rating was cut to Ba1 from Baa3, long-term deposit rating to Baa3 from Baa2 and the subordinated debt rating to B3 from B1, Moody's said in a statement.

LTCB, weighed down by huge bad loans, said in late June it was in merger talks with Sumitomo Trust and Banking Co Ltd but has failed to regain confidence among investors fearing its collapse.

The spotlight was on LTCB as the government of new prime minister Keizo Obuchi raced to pass legislation to clean up an estimated 87.5 trillion yen ($621 billion) in bad debt in the finance industry.

Details of the pending LTCB merger with Sumitomo Trust and Banking were unavailable, Moody's said, and uncertainty about the deal meant the ratings outlook remained negative.

But even the possible benefit from the merger and any capitalinjection may "not be sufficient to strongly recover the threatened viability of its core banking business in the near term."

LTCB issued a statement saying the Moody's action was "highly regrettable."