TOKYO - Japanese ruling party kingpin Ichiro Ozawa denied on Saturday any wrongdoing in a funding scandal that is dimming his party's mid-year election prospects, and vowed to stay on in his key position.

Prosecutors questioned Ozawa, seen as the most powerful politician in the ruling Democratic Party, for four hours on Saturday over the scandal, in which three of his aides were arrested on suspicion of misreporting political donations.

The scandal has eroded support for Prime Minister Yukio Hatoyama's government ahead of the poll for parliament's upper house, risking policy stalemate in the long term.

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Graphic on Japan voter support: r.reuters.com/myv63g

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Ozawa, who holds the key post of party secretary-general, is the Democrats' key campaign strategist and is widely seen as the real power behind Hatoyama's administration.

I have to apologize to the public about things including my aides, but I would like to fulfill my duty, he told a news conference when asked if he will stay in his post.

Ozawa also released a statement denying that either he or his funding group had received illegal donations, or that he himself was involved in any false reporting of political funds.

The Democrats need an upper house majority to reduce reliance on small coalition partners and enable them to pass bills smoothly. The party swept to power last year promising to reduce bureaucrats' control of policy, cut waste and boost consumer spending power to help the weak economy.

Ozawa came under fire after prosecutors arrested the former and current aides earlier this month.

He has repeatedly denied any intentional wrongdoing and he was not legally obliged to respond to the prosecutors' request that he answer questions about the case.

PM HOPES OZAWA INNOCENT

Japanese media have said prosecutors suspected construction firms seeking public contracts may have contributed some of the misreported funds. Some newspapers said prosecutors were probing the possibility Ozawa was involved in illegal activities.

Hatoyama has backed Ozawa, credited with engineering his party's historic win in an election for the more powerful lower house last August that brought it to power, and said he hoped the party No.2 would have a chance to prove his innocence.

On Saturday, he repeated his hope that Ozawa was innocent.

He has said he is innocent, and I want to believe that, Hatoyama told reporters ahead of Ozawa's news conference.

Some analysts say Ozawa, who resigned the party's top post last year over a separate scandal, will have to step down this time too, but may not decide to do so for a while.

Opposition lawmakers, who grilled Hatoyama this week about the scandal during parliamentary debate on an extra budget for the year to March 31, vowed to keep up their attack.

He should remove his (member of parliament's) pin, explain himself to the people and then run for a seat again, said Shuzen Tanigawa, a senior lawmaker in the opposition Liberal Democratic Party, which was ousted after a half century of almost unbroken rule in the August poll.

The extra budget, however, is expected to be enacted next week because the opposition would risk a public backlash if they delayed the steps, aimed at bolstering Japan's economy.

Despite slipping voter support for the government, the LDP has not recovered much ground since being ousted from power.

Ozawa said he hoped for fair and calm reporting by media and a fair investigation by prosecutors, but refrained from criticizing the probe.

Ozawa, who bolted the then-ruling LDP in 1993 and spent the years after striving to defeat his former colleagues, has been a double-edged sword for the Democrats.

His electioneering skills are seen as important to winning the upper house election, but his image as an old-style political fixer is denting the popularity of the party, which took power pledging to sweep away politics based on vested interests and collusion between lawmakers and bureaucrats.

(Additional reporting by Miho Yoshikawa and Yoko Kubota; Writing by Linda Sieg)

Japan