Japan PM says won't resign after ex-aides charged

TOKYO (Reuters) - Japanese Prime Minister Yukio Hatoyama said on Thursday he would not resign after two former close aides were charged over falsified political funding records, but the indictments could erode voter support.

Polls show a majority of voters agree he need not step down, but are increasingly critical of a three-month-old government that has backtracked on costly campaign promises and failed so far to resolve a dispute with Washington over a Marine base.

"I feel a renewed sense of responsibility to fulfill my duties as a politician," Hatoyama said at a hastily called news conference, during which he apologized to the nation.

"If the political situation stagnates and a lot of people start to think they can't take it any more, then I would cause trouble by staying as prime minister, but I will work not to have that happen."

A sharp slide in voter approval could endanger the premier's grip on his post ahead of an upper house election in mid-2010. His Democratic Party is seeking an outright majority to reduce the clout of two tiny coalition partners.

Polls show voters are unhappy with Hatoyama's explanation of the misreported donations. Media have repeatedly shown footage of Hatoyama, while in opposition, insisting that politicians are responsible for any wrongdoing by their secretaries.

There is no suspicion of bribery because the funds, amounting to more than 300 million yen ($3.28 million), were funneled from Hatoyama's own family fortune, media reports say.

But the indictments will put Hatoyama's leadership to the test as voter support has fallen below 50 percent in some polls from initial highs over 70 percent. Doubts have grown over his ability to make tough decisions on the economy and diplomacy.

The premier has repeatedly denied knowing anything about the misreporting and said he would pay any taxes that may be due on cash received from his mother, a wealthy heiress.

"Since it is not a corruption case, how Prime Minister Hatoyama handles this incident will be a key test as doubts grow over his leadership, decision-making ability and crisis management skills," said Tsuneo Watanabe a senior research fellow at the Tokyo Foundation.

Media said prosecutors had also asked to question a lower house lawmaker from Hatoyama's Democratic Party over a separate political funding scandal clouding the party's No.2, Ichiro Ozawa.

Jiji news agency said prosecutors decided not to charge Hatoyama himself, but analysts say the indictments amount to a blow for the premier at a vulnerable time.

"The (opposition) Liberal Democratic Party is too weak to force him to resign ... and I don't think Hatoyama will voluntarily step down either," said Kyohei Morita, chief economist at Barclays Capital Japan.

Morita expected limited impact on financial markets, "but it may worsen voter support ahead of the upper house election."

"The problems will come in parliament next year, when he will be attacked by the Liberal Democratic Party over this," said commentator Harumi Arima. "The question is whether he can stand up to that."

(Additional reporting by Yoko Nishikawa and Isabel Reynolds; Editing by Ron Popeski)