Japan's government has begun looking into special legislation to deal with the restructuring of struggling Japan Airlines Corp, the Yomiuri newspaper reported on Saturday.

Liabilities at JAL would exceed its assets by as much as $8.8 billion if Asia's largest airline by revenues were liquidated, a source with direct knowledge of the matter said on Friday, underscoring the depth of the problems facing the airline as it seeks aid from banks and the state to avoid bankruptcy.

The Yomiuri said the special legislation would force the airline to reduce pension payments and that reaching a solution on that issue, a major hurdle in discussions, could prompt creditors to take a more favourable stance towards the airline.

It said the legislation could be submitted to an extraordinary session of parliament opening on Monday.

The Nikkei business daily said on Saturday that a decision on JAL was likely within the month.

A government taskforce on JAL's restructuring is seeking a bridge loan of about 180 billion yen to prevent JAL from running out of cash next month and a total capital boost of 300 billion yen from both the government and the private sector, said the source, who spoke on condition of anonymity.

The taskforce is led by turnaround specialists and reports to Transport Minister Seiji Maehara.

JAL shares, which are down more than 40 percent this year and hit a record low last week, slid 6.6 percent on Friday, extending losses after the Nikkei newspaper said some creditors wanted JAL to cut its capital to hold shareholders accountable.

At least one cabinet minister is concerned about guaranteeing loans to JAL, sources with access to cabinet ministers were quoted by Japanese media on Saturday as saying.

JAL is headed for its fourth annual loss in five years, weighed down by roughly $15 billion in debt and a bloated cost base that makes it less efficient than domestic rival All Nippon Airways Co.

Maehara told a news conference he met Prime Minister Yukio Hatoyama and Finance Minister Hirohisa Fujii on Friday to discuss the state's role in supporting JAL, and that a final decision would fall to Hatoyama.

The task force also wants to use a recenty introduced scheme, called Alternative Dispute Resolution, under which a third party would mediate between JAL and its creditors on an out-of-court debt restructuring, according to the source.

But creditors, which include the country's top three lenders and the state-owned Development Bank of Japan, have so far rebuffed the plans presented by the task force, arguing they are being asked to carry too much of the burden to revive JAL.

(Reporting by Elaine Lies; Editing by Paul Tait)

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