Japanese powerbroker Ichiro Ozawa may withdraw his challenge to Prime Minister Naoto Kan in a party leadership race, Jiji news agency said on Monday, as Kan's predecessor sought to avert a clash that could split the party.

But big questions would remain about how the two rivals would resolve differences over Kan's drive to rein in Japan's huge public debt even if an overt confrontation was avoided.

Standing together with his predecessor Yukio Hatoyama, Kan told reporters he had agreed to a proposal by the former premier to take into account the troika under which he, Ozawa and Hatoyama governed the Democratic Party of Japan in recent years.

But Kan said there had been no discussion of personnel changes in response to reported demands from Ozawa.

I told him it is very important now to show party unity, Hatoyama told reporters after meeting with Kan, adding that he would set up a meeting between Kan and Ozawa on Tuesday.

Hatoyama added that Ozawa would likely decide whether to run in the party race after a meeting with the premier.

Jiji news agency reported that a close aide to Ozawa said the powerbroker might decide to withdraw his candidacy.

The winner of the DPJ vote will almost certainly be premier by virtue of the party's majority in parliament's powerful lower house.

OPINION POLLS

Opinion polls showed on Monday a vast majority of Japanese voters want Kan to beat Ozawa, who stepped down as party leader over a funding scandal last year, in the September 14 party election.

The confrontation is threatening to create a policy vacuum as Tokyo struggles with a strong yen and fragile recovery.

A Mainichi newspaper survey showed that 78 percent of voters polled wanted Kan to win the leadership race, while 17 percent said they saw Ozawa, a critic of the prime minister's efforts to rein in Japan's huge public debt, as suitable for the top post.

That was in line with polls by Nikkei business daily and the Yomiuri newspaper.

Ozawa has criticised Kan for floating a possible rise in Japan's 5 percent sales tax ahead of a July upper house election, defeat in which cost the ruling bloc its majority in the chamber, forcing the Democrats to seek opposition help to pass bills.

Admirers have credited veteran lawmaker Ozawa with engineering the huge election win that swept the DPJ to power for the first time exactly one year ago, but many voters are put off by his image as a scandal-tainted wheeler-dealer.

Ozawa resigned from the party's No.2 post in June, along with Hatoyama, whose indecisive leadership helped erode voter support.

Many voters are also reluctant to see another change at the top. Kan, who took office after Hatoyama suddenly quit, is Japan's fifth prime minister in three years.

Ozawa heads the biggest group within the ruling party, but besides DPJ parliamentarians, local lawmakers and party supporters can also take part in the party leadership vote, so public opinion is likely to affect the outcome -- which at present is difficult to predict.

(Additional reporting by Kiyoshi Takenaka; Editing by Linda Sieg and Alex Richardson)

Japan