"There is no prospect of a breakthrough yet in sight, although the people working on the matter want a conclusion by the end of this week," finance minister Kiichi Miyazawa told a panel of parliament's Upper House on Friday.

"Thorough discussions are continuing but I can't report any concrete results and at this stage, negotiations have not progressed," Miyazawa added.

Banking worries helped knock down Tokyo share prices on Friday, and the 225-share Nikkei average sank more than 3 per cent to close down 481.94 points at 13,723.84.

Just a week ago, the ruling Liberal Democratic Party (LDP) and two opposition groups appeared to reach a deal that would nationalise the troubled Long-Term Credit Bank of Japan Ltd (LTCB), strip the finance ministry of its financial policy-making powers andabolish a 13 trillion yen ($97.0 billion) fund set up to recapitalise banks, while studying a replacement scheme.

But the agreement -- if such it ever was -- quickly unravelled as it became clear that the LDP still wanted to inject taxpayers' money into LTCB and go ahead with a planned merger with Sumitomo Trust & Banking Co Ltd.

"The failure of any big financial institution should be avoided," prime minister Keizo Obuchi told a parliamentary panel, adding that LTCB should not be allowed to fail and that its merger was vital for the financial system.

Ichiro Ozawa, head of the smaller opposition Liberal Party, said last Friday's deal was never really a deal at all.

"The agreement among the LDP, the (main opposition) Democrats and the (Buddhist-backed) Heiwa-Kaikaku differed depending on how you looked at it and they could interpret it however they wanted," Ozawa told Reuters Television.

Reaching a compromise on the financial sector bills and on LTCB is seen as key to cleaning up and consolidatingJapanese banks, burdened by bad loans which have been conservatively estimated by the government at 87 trillion yen.

The LDP needs to make a deal with at least part of the opposition, because the ruling party lacks a majority in the Upper House, which can essentially block most legislation.

Ozawa said progress in the ruling party-opposition talks would be tough, but that chances the deadlock would spark a snap election for the powerful Lower House were slim just now.

"Our way of thinking is completely different, because the LDP (ruling Liberal Democratic Party) wants to protect and continue the old system," Ozawa said.

"If so, they should say so clearly and their proposals will pass the Lower House but be rejected in the Upper House. At that point, I think it would be OK to have an election, but we are not in a situation for that to occur. So the chance of a snap election in the near future is slim," he said.

Analysts say the Democrats and Heiwa-Kaikaku are caught in a bind. They want to stick totheir stern stance to win favour with voters, but are reluctant to risk elections for which they are not well-prepared and which might expose them to criticism for creating a political vacuum at a time when Japan's economy and financial system are in trouble.

In another twist to the complex bank talks saga, top government spokesman Hiromu Nonaka said on Friday that LTCB should not forgive loans it made to its non-bank affiliates.

LTCB said it was sticking to its plan to forgive the loans. But Nonaka's remarks, reported by Japanese media, were in sharp contrast to the LDP's previous stance and appeared to be a nod to the opposition view that forgiving the loans would be a bailout for agricultural co-ops which have lent heavily to the firms and which are also big backers of the LDP.

A government plan in 1996 which used 685 billion yen in public money to wind up failed mortgage firms, known as "jusen", sparked public outrage and Miyazawa has admitted that the move was in large part intended to help farmco-ops, which had lent aggressively to the mortgage firms.