(For more stories on Japanese politics click on [ID:nPOLJP])
* Pressure mounts on Japan opposition chief Ozawa to resign
* Local party chapters fear scandal fallout on election
* Delay in resignation would deepen damage at polls
By Linda Sieg
TOKYO, March 6 (Reuters) - Pressure was mounting on Friday on Japan's opposition leader to step down over a fundraising scandal that has ensnared a close aide ahead of an election his party had looked likely to win.
Democratic Party leader Ichiro Ozawa, 66, has denied any wrongdoing and said he would not resign over the arrest of the senior aide on suspicion of taking illegal corporate donations.
On Friday, Ozawa repeated that he was not thinking of quitting ahead of an election that surveys had shown was likely to end more than half a century of almost unbroken rule by Prime Minister Taro Aso's conservative Liberal Democratic Party.
"I am not thinking at this point about whether or not to resign," Ozawa told reporters.
Doubts are growing, however, over whether Ozawa can now lead the Democrats to the decisive victory needed to break political deadlock in Japan as it struggles with a worsening recession. [ID:nT95926]
Surveys by the Asahi and Yomiuri newspapers showed at least two-thirds of the Democratic Party's 47 local chapters were worried about the impact on the election, which must be held by October.
"Voters will take a long, hard look (at us)," the Yomiuri quoted one local chapter member as saying. "We'll have to revamp our strategy for the lower house election."
Democratic Party lawmaker Masaharu Nakagawa, who holds a finance portfolio in a British-style opposition shadow cabinet, said party members were watching developments for now.
"Mr Ozawa should reach a conclusion (on what he will do) if any new evidence becomes available," Nakagawa told Reuters.
The scandal has hit the Democrats, who have vowed to end bureaucratic control of policy and adopt a diplomatic stance less reliant on close ally Washington, just as their chances of ousting the ruling bloc had looked increasingly solid.
Aso, 68, has struggled with rock-bottom popularity ratings after policy flip-flops and gaffes as he tries to cope with a divided parliament, where the opposition can delay bills, and to implement policies to battle Japan's deepening recession.
BEST DONE QUICKLY?
Expectations that prosecutors will indict the aide and media reports they may also question Ozawa are boosting pressure on the leader to quit to limit damage to his party, analysts said.
Japanese prosecutors typically indict those they arrest, but generally have up to 20 days to do so.
Ozawa, a one-time LDP rising star who defected in 1993 and helped briefly oust the party, has suffered a reputation as an old-style fixer that contrasts with his image as a bold reformer who wants to end bureaucratic control of policy. [ID:nSP452763]
His campaign skills have been key to the party's rise, but analysts said a quick exit was what was needed now.
"They can save the situation and it might even work out better if they act quickly and decisively against anything that looks like corruption," said Steven Reed, a political scientist at Chuo University in Tokyo.
Ozawa's woes have prompted talk that Aso might call a snap election in May, but the LDP has not been immune to the scandal over donations from Nishimatsu Construction Co Ltd (1820.T).
Trade Minister Toshihiro Nikai said on Thursday his party faction would return funds from groups linked to the firm, as did a junior cabinet member and a special adviser to Aso. Japanese media said former prime minister Yoshiro Mori would do the same.
All denied any illegal actions but Kyodo news agency said prosecutors were investigating ruling party cases as well.
With Ozawa's political fate in the balance, speculation simmered about possible successors. Former Democratic Party leader Katsuya Okada, the 55-year-old son of a supermarket magnate, topped the list of possible candidates mentioned by party chapters in the Asahi and Yomiuri surveys.
Okada, who has been pushing steps to fight global warming as a key policy issue, led the party to a robust showing in a 2004 upper house election. But he stepped down after a big defeat in the last lower house poll in 2005.
Other names being floated are ex-party leader Seiji Maehara, 46, a conservative expert on security matters; Ozawa's two deputies Yukio Hatoyama and Naoto Kan, both 62; and 51-year-old Yoshihiko Noda, often cited as a potential future party chief. (Additional reporting by Yoko Nishikawa; Editing by Michael Watson)