The Liberal Democratic Party proposal, to be submitted to opposition groups in the afternoon, would address the last outstanding issue in compromise talks on legislation to shore up Japan's frail banking system, the reports said.

The LDP and two opposition groups have already agreed measures to temporarily nationalise Long-Term Credit Bank of Japan and wind up failed banks, and have a general pact on reducing the finance ministry's powers over banks.

Clearing the mountain of bad loans from the nation's banks, helping weak but viable banks and promoting financial industry consolidation are seen as key to reviving the world's second-biggest economy from its worst postwar recession.

Following are key points of the LDP plan, according to the media reports:

For internationallyoperating banks whose capital falls below 8 per cent of assets (below 4 per cent for banks that operate only within Japan), bad loans would be sold to a proposed US-Style Resolution Trust Corp.

Publicly funded capital injections, through the purchase of preferred shares, would be vetted through an independent committee. Capital injection amounts would be limited to those of the losses incurred through the sale of the bad loans.

For banks with capital-adequacy ratios below 4 per cent (2 per cent for purely local banks), the government would buy a controlling interest in the bank's common shares, sell the bad loans to the RTC and provide capital injections.

Banks with capital ratios below 2 per cent (1 per cent for local banks) would be placed under "special public administration," the nationalisation scheme envisaged for LTCB.

This would involve the government making forced purchases of all a bank's common shares. After cleaning out its loan book, the government would sell the shares back to theprivate sector.

The reports said the LDP plan would also toughen disclosure requirements, including more detailed reporting of "grey zone" Class Two loans and the disclosure of loan-loss provisions for those loans.

The LDP will set up a working group with its negotiating partners, the largest opposition Democratic Party and the Heiwa-Kaikaku group, on Tuesday, business daily Nihon Keizai Shimbun reported.

The Liberal Party -- which earlier walked out of the negotiations on the financial bills because it said the other parties were too lenient on the banks -- was expected to rejoin the talks, the newspaper said.

The report said the LDP wants to get the already submitted financial bills through the Lower House by Friday and enacted by the Upper House by October 9, meaning an extension of the current session of parliament beyond its scheduled October 7 finish.

The newspaper said the LDP wants to extend the session by seven to 10 days to pass laws on the debts of the former Japanese NationalRailways, but the report did not mention the legislative schedule of the measures on weak banks.