Japan's parliament on Tuesday installed Yasuo Fukuda as the new prime minister of the world's second largest economy, setting the stage for the seasoned moderate to form a cabinet that must confront a feisty opposition keen to force an election.

Earlier, the ruling Liberal Democratic Party (LDP) chose the 71-year-old Fukuda as its leader to revive party fortunes after a disastrous year of scandals and election defeat under Shinzo Abe, who resigned abruptly on September 12.

Fukuda, a strong advocate of warmer ties with Japan's Asian neighbors, bowed and smiled after being voted in as prime minister by the lower house of the parliament, where the ruling party has a huge majority.

Fukuda, who will pick his cabinet later in the day, said, "I want to have dignified discussions with the aim of protecting the people's livelihoods and the national interests."

"I'm very moved... I am prepared to work with my heart and soul so that I can fully achieve this responsibility," Fukuda said.

Fukuda faces challenge from Ichiro Ozawa, 65, leader of the main opposition Democratic Party who was voted by the opposition-controlled upper house of the parliament.

Japanese media are speculating that Fukuda will likely retain most ministers - including Finance Minister Fukushiro Nukaga - in the cabinet, which had been reshuffled by Abe last month.

Public broadcaster NHK said Fukuda would give the powerful post of chief cabinet secretary to another LDP veteran, outgoing Foreign Minister Nobutaka Machimura.

Fukuda said former Foreign Minister Taro Aso, Fukuda's sole rival in the LDP leadership race, declined an offer of a cabinet post, but added he was still seeking his cooperation.

Fukuda will also have to balance calls to pay more heed to regions and sectors left behind by reforms begun under Abe's predecessor, Junichiro Koizumi, with the need to rein in spending because of Japan's huge public debt, and find ways to fix social welfare creaking under the weight of a rapidly ageing population.

Fukuda has pledged to regain support in part by easing the pain of rural areas that feel left out of the recovery in the world's second largest economy and to take a humble view on wartime history, a frequent source of friction with China and South Korea.

No election for the lower chamber is needed until late 2009, but many expect one sooner, possibly after the government budget is enacted in March 2008.

"I don't think Fukuda's cabinet can last long with a divided parliament. Snap elections will be inevitable, probably next spring" before a budget bill comes up for approval," said Jiro Yamaguchi, professor of politics at Hokkaido University.

Meanwhile, Abe, who was hospitalized after complaints of stress-related stomach pains, has apologized for leaving his party and his country in the lurch. "I feel extreme regret, and am sorry that I had to resign in the middle of realising my aims," Abe said.

Abe, who lost a landslide election in July to the opposition Democratic party of Japan which now controls the upper house, resigned with his entire cabinet in a formality shortly before the vote.

Abe had cited his failure to continue the Afghanistan mission as a reason for resigning, although he later said he quit for health reasons.

The mild-mannered Fukuda, 71, will be the oldest new prime minister since Kiichi Miyazawa assumed the office in 1991 at the age of 72, and the first son of a premier to hold the post. Fukuda's father, former Prime Minister Takeo was also appointed as the prime minister at the age of 71.

Fukuda has spent 17 years at an oil company and entered politics relatively late. He was chief cabinet secretary, the top aide to the premier, from 2000 to 2004, where he earned a reputation as a behind-the-scenes operator who could manage the bureaucracy.