* PM Noda says willing to dissolve parliament Friday
* Opposition suggests willing to meet Noda's conditions
* Ruling Democrats set to lose, LDP return to power
* Election likely set for Dec. 16
* LDP chief calls for "unlimited" monetary easing
By Kaori Kaneko and Tetsushi Kajimoto
TOKYO, Nov 14 (Reuters) - Japanese Prime Minister Yoshihiko Noda is set to dissolve parliament's lower house on Friday for a snap election next month, which is likely to cost him his job and return to power a party that has governed Japan for most of the past 50 years.
Opinion polls show Noda's Democratic Party of Japan (DPJ) heading for a heavy drubbing in the vote, set by government and senior party members for Dec 16, and the revival of the Liberal Democratic Party (LDP) after just three years in opposition.
Under its leader, former Prime Minister Shinzo Abe, 58, the LDP may be more assertive in dealings with China and usher in more expansive spending policies after Noda focused on reining in the country's ballooning public debt.
The lower-house term ends in August 2013. Noda promised the LDP and its partner last August he would hold an election "soon" in order to win their backing in the opposition-controlled upper house for his signature sales tax increases.
"I want to carry out a dissolution (of the lower house) on the 16th," Noda said in response to questions from an opposition leader in parliament.
However, Noda indicated his call for an election was conditional on opposition support on a financing bill and voting reform.
The opposition has agreed to speed bills through parliament to fund 40 percent of budget spending and Abe indicated his party had already promised support for voting reform, which would include cutting the number of lower house lawmakers.
"Let me repeat that promise here," he told Noda in a debate in a parliamentary committee.
Noda, 55, is already Japan's sixth prime minister since 2006 and the third since the DPJ swept to power in 2009 promising to change how Japan is governed after more than half a century of nearly non-stop LDP rule.
But support for the DPJ has plummeted since then due to policy confusion and political stalemate and many in Noda's party would prefer a delay in the election date.
Economy Minister Seiji Maehara, one of those supporting early polls, already laid out possible battle lines.
"This election will be fought on a few issues. It's a question of whether or not you want to continue using nuclear power," he told reporters. Japan's public has developed deep safety concerns about atomic power since an earthquake and tsunami triggered the Fukushima radiation crisis last year.
"It's also a question of whether you want to spend money on public works or whether you want the Democrats' policies that emphasize spending on healthcare, child care, science and economic growth," Maehara added.
Noda has also said he would make Japan's membership in a controversial U.S.-led free trade pact part of his party's election platform.
Indian Prime Minister Manmohan Singh delayed a trip to Japan, which had been due to start on Thursday and last until Monday, because of domestic issues in Japan, the Indian Foreign Ministry said.
Japan's election will come at time when the economy is sliding back into recession and its relations with China are the chilliest in decades following a flare-up in tensions over a disputed island chain.
Abe, who wants to revise Japan's pacifist constitution , has called for Japan to adopt a tougher line on China, though during his term as prime minister in 2006-2007 he was credited with improving relations with Beijing.
He also looks set to lean even harder than the current government on the Bank of Japan to help kick-start the world's third-largest economy with aggressive monetary stimulus. The news that an election appeared imminent prompted a yen selloff as markets factored in an LDP win.
Speaking shortly after the parliamentary debate, Abe called on the BOJ to adopt a more ambitious inflation target and "print unlimited yen" to achieve that.
"Abe has been calling for aggressive monetary easing. The key would be who he will select as economics minister, and who he will appoint as new BOJ governor," said Yasuo Yamamoto, senior economist at Mizuho Research Institute in Tokyo.
Abe also suggested a new government should compile a supplementary budget and increase public works spending.
The election could be good for the economy if it produced a more stable government and more consistent policymaking, Yamamoto said.
However, opinion polls suggest that the LDP and its tradition ally, New Komeito party, may fall short of a majority.
Political analysts say that such a scenario might give a coalition role to new, untested forces such as a party led by populist Osaka mayor Toru Hashimoto, possibly leading to more policy paralysis and confusion.