The dispute is one of the thorniest in US-Japan economic ties and both sides have said they would like to resolve it ahead of the July 21 to 23 Group of Eight (G8) leaders summit on Japan's southern island of Okinawa.

"I told the President (Bill Clinton) that I would strive for a resolution ahead of the summit and once my new cabinet is formed, I want to hear about the situation," Japanese media quoted Prime Minister Yoshiro Mori as telling reporters.

"If there is a concrete proposal, I would like both sides to strive to reach a settlement," said Mori, who is set to form his new cabinet on Tuesday.

Japan and the US will open talks in Tokyo on July 10 to try to clinch a deal ahead of the summit. Optimism that Tokyo was near an agreement helped push NTT's shares up 5.67 per cent on Monday to 1.49 million yen.

Tokyo Mitsubishi Securities senior analyst, Toshiaki Iba, said that although the deal would reduce NTT's revenue and earnings, investors bought the stock now that the scale of the negative impact was becoming clearer.

Washington has demanded a hefty 41 per cent cut immediately in the fees that NTT charges its rivals for access to its local lines, while Tokyo has offered a 22.5 per cent cut over four years. Unofficially, both sides have floated compromise proposals but they failed to bridge the gap at talks in March. The mass circulation daily Yomiuri Shimbun said on Monday the two sides were likely to agree that NTT cut the rates by around 28 per cent by the end of 2002. Tokyo and Washington are also expected to agree to discuss further rate cuts "in light of NTT's business performance", the Yomiuri said. That report follows posts and telecommunications minister Eita Yashiro's remarks last Friday, when he said that NTT should speed up its proposed rate cuts.

NTT, however, balked at the suggestion, saying a speedier timetable would prevent one of its regional units, NTT West, from achieving profitability in the year beginning April 1, 2002.

Japan has argued that cutting the rates that NTT charges, it's competitors as far and as fast as Washington wanted, would hit NTT's profits hard and threaten jobs at the telecoms giant.

That argument, though, was undercut in May when NTT reported a 980.30 billion yen ($9.32 billion) operating profit and again last Friday, when its two regional units revised up their earnings forecasts for the current business year. On Monday, the former state monopoly itself announced a hefty upward revision for its group profits for this business year.

NTT said its consolidated net profit were expected to total 172 billion yen for the year ending next March, up 73.7 per cent from its earlier estimate of 99 billion yen. This compared with actual loss of 67.81 billion yen the previous year.

NTT, 53 per cent owned by the Government, said the upward revision came after the brighter earnings prospects for its regional units, NTT West and East. Failure to settle the spat on rates could be embarrassing for Mori, who plans to make Information Technology the centrepiece of the G8 summit of rich nations and Russia.

The US has threatened to file a complaint with the World Trade Organisation (WTO) by the end of July if Tokyo refuses to cut the fees, which Washington says bolster NTT's iron grip on the world's second-largest telecoms market.