The government is keen to do a deal on the touchy topic before prime minister Keizo Obuchi leaves for the United States on Sunday.

Obuchi is set to meet US president Bill Clinton on Tuesday and would desperately like to report that a plan to clean up the bad loan-laden banking system is well on its way to implementation.

Ruling Liberal Democratic Party (LDP) official Takashi Fukaya told reporters that Obuchi was likely to meet opposition leaders including Naoto Kan, head of the biggest opposition Democratic Party, to try to break a deadlock over two key points. But he added that no firm date and time had been set.

Fukaya said the two sides were still at odds over how to handle the troubled Long-Term Credit Bank of Japan Ltd and opposition calls for reducing the policy making powers of the ministry of finance.

"There were two points thatcould be resolved at the working level so we will likely leave those issues to the top level," Fukaya said.

Obuchi was scheduled to meet finance minister Kiichi Miyazawa in the afternoon to discuss the matter.

Media reports said that the LDP and opposition were expected to reach an accord at a leaders' meeting late on Thursday.

Financial daily Nihon Keizai Shimbun said that the two sides had reached a basic agreement to temporarily nationalise LTCB by having the government buy the bank's common shares under a scheme originally proposed by the opposition.

At the same time, the opposition is ready to countenance an infusion of taxpayers' money to LTCB. The LDP earlier on Thursday presented its latest offer to its opposition rivals.

The ruling party, which lacks a majority in parliament's Upper House, has in recent days made a series of compromise offers to bring its banking scheme closer to more stringent opposition proposals that would immediately nationalise failed banks, place a heavier burden onshareholders, and shorten the time period needed to effect a financial system consolidation.

In its latest draft, the LDP also said that the government would -- on its own responsibility -- prepare a scheme to stabilise the financial system, including a remedy for under capitalised banks. The draft did not elaborate on what that scheme might be.

Financial analysts said that whatever framework was finally agreed upon, authorities would have a tough time restoring confidence in their ability to implement the scheme.

"For me, the biggest question is one of credibility," said Alicia Ogawa, head of research at Salomon Smith Barney. "Is there anyone left in Japan who has any credibility?"

While the politicians bickered, Tokyo share prices slumped on renewed concerns over the banking system. The 225-Nikkei share average was down 2.40 per cent, or 340.26 points, at 13,857.44 about half an hour before the close of trade.

US trade representative Charlene Barshefsky, meanwhile, gave voice to Washington'sconcerns about Japan's fragile financial sector.

"It is critically important that the opposition and the majority party work through this problem so as to make provisions for substantial public funding for Japanese banks... and in particular with respect to weak but solvent banks," she told reporters, echoing almost verbatim comments by US Treasury secretary Robert Rubin on Wednesday.