Japanese Prime Minister Yasuo Fukuda struggled on Friday to break a deadlock that has halted a refueling mission in support of U.S.-led operations in Afghanistan -- and threatens to stall other policies as well.

Fukuda met opposition Democratic Party leader Ichiro Ozawa for the second time this week to ask for his agreement to resume the mission in the Indian Ocean, where Japanese ships had been providing free fuel for U.S. and other ships patrolling for drug runners, gun smugglers and suspected terrorists.

The ships were called home on Thursday after a law enabling the activities expired. With opposition parties, now in control of parliament's upper house, vowing to vote against a new bill, the mission will now be halted for months if not longer.

Under pressure from the United States, Fukuda wants to at least show he is trying hard before a meeting with U.S. President George W. Bush in Washington in the week of November 12.

Ozawa, speaking to reporters during a break in the meeting, said Fukuda had asked if there was any way the Democrats could agree to allow the mission to resume.

We talked about the anti-terrorism law again and the prime minister asked if there was any way (to resolve the deadlock), but I told him the longstanding position of myself and our party, said Ozawa, who has argued that the naval activities lacked United Nations approval and violated Japan's pacifist constitution.

The prime minister said he wanted to take a break and he would collect his thoughts and resume the talks. Party officials said the meeting was to resume at 6.30 p.m. (5:30 a.m. EDT).

Ozawa has said he would be willing consider new legislation outlining conditions under which troops could be sent overseas without requiring an ad hoc law each time, Japanese media said.

Fukuda told reporters on Tuesday that such a proposal could be discussed, but the two sides have different positions on the possible content, so reaching agreement would be tough.

SPECULATION SWIRLS

Japan's military is constrained by its pacifist constitution, and overseas dispatches are always controversial. Public opinion is divided over the Indian Ocean mission.

The talks between the political leaders -- their second this week -- have sparked speculation the pair are plotting a grand coalition to resolve a stalemate created when the Democrats and their allies won a majority in parliament's upper house in July.

On the surface the Democrats, who could have their best chance ever of taking power in the next general election, appear to have little to gain.

But Ozawa, who bolted the Liberal Democratic Party (LDP) in 1993, kicking off a chain reaction that briefly ousted the long-ruling party, has done surprising turnabouts before.

All we can do is wait for the results of this meeting, said Yasunori Sone, a political science professor at Keio University.

Financial market players were mostly blase about the political maneuvering, concerned instead with a fresh wave of credit worries that drove down stocks in Wall Street and Tokyo.

If the talk (of a grand coalition) actually came close to something concrete, it might become a factor for the market, said Takahiko Murai, general manager of equities at Nozomi Securities.

The meeting has also sparked rumors about a snap election for parliament's lower house as early as December.

No election need be held until late 2009, but pundits are predicting that the political deadlock will force an early poll, most likely after the national budget is enacted in late March.

(Additional reporting by Elaine Lies and Teruaki Ueno)

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