Prime Minister Yukio Hatoyama came under fire over a funding scandal on Christmas Day, with Japanese media speculating that he might have to step down if voters found his explanations unconvincing and his leadership disappointing.

Hatoyama, whose Democratic Party swept to power in an August election that ousted their long-dominant conservative rival, said on Thursday he would not resign after two former close aides were indicted over false political funding records.

But the indictments put Hatoyama's leadership to test at a time when polls show voter support has fallen below 50 percent from initial highs over 70 percent, as doubts grow over his ability to make tough decisions on the economy and diplomacy.

Media polls before the indictments showed most voters felt that Hatoyama need not resign over the affair, which included the receipt of large amounts of money from his mother, daughter of the founder of tyre maker Bridgestone Corp.

But after his news conference, public opinion may change. If there is any contradiction to his explanation in the future, the situation may completely change ... if that happens, that could force the prime minister to decide whether to resign, the Mainichi newspaper said in an editorial.

Sagging ratings would undermine the Democrats' chances of winning a majority in an upper house election in mid-2010, leaving them dependent on their two tiny partners whose conflicting views make policy-making messy. A loss could create a policy deadlock, since the upper chamber can delay bills.

Hatoyama has long been a critic of political corruption who has said in the past that lawmakers should quit if their aides were guilty of misdeeds.

He left the door open to changing his mind and departing but said that, for now, he believed his quitting would betray voters' hopes.

Precisely so, said the Nikkei daily in a commentary.

The question is whether he can demonstrate leadership to carry out policies. What voters have given the prime minister is a moratorium.

Hatoyama's government, which has pledged to pay more heed to consumers and workers' interests than companies, was racing on Friday to finalize a draft budget for the year from April.

The budget is likely to add a record 44 trillion yen ($481 billion) in new borrowing to Japan's already huge public debt, despite the jettisoning of a key pledge to end a petrol surcharge because of a sharp fall in tax revenues due to Japan's worst recession since World War Two.

Japan