The Japanese government plans to dedicate up to 10 trillion yen ($127 billion) in crisis lending to businesses to help them finance day-to-day operations and repair damage from last week's deadly earthquake and tsunami, the Nikkei newspaper reported on Saturday.

The government can provide special financing in the form of low-interest loans or interest payment subsidies backed by public funds when a natural disaster or other event triggers major economic instability, the Nikkei said.

The newspaper, without citing any sources, said that the government was considering allocating several trillion yen and up to 10 trillion yen to the scheme. Funds needed to support the scheme would be set aside in an emergency budget.

The government looks certain to need an extra budget to fund disaster relief and reconstruction after the triple blow of a massive 9.0 magnitude earthquake, a tsunami and a dangerous radiation leak at a quake-crippled nuclear plant.

The authorities, struggling to contain the nuclear crisis, have yet to produce an estimate of how much government spending would be needed to help the economy get back on its feet.

Economics Minster Kaoru Yosano told Reuters in an interview earlier this week that the economic damage from the disaster would exceed 20 trillion yen, which was his estimate of the total economic impact of the 1995 earthquake in Kobe.

Yosano said government spending was likely to exceed the 3.3 trillion yen Tokyo spent after Kobe, which up to now has been considered the world's costliest natural disaster.

On Friday, the Sankei newspaper said that the government planned to issue more than 10 trillion yen in emergency bonds to pay for the reconstruction and that the central bank would fully underwrite the issue. But Yosano and other government officials denied the report, saying no such plan was in place.

The Nikkei said the government was also discussing creating a recovery fund that would provide medium- to long-term lending for firms directly hit by the disaster. However, setting up such a fund would require several changes to the law.

(Reporting by Tomasz Janowski; Editing by Nathan Layne)

Japan Quake