Foreign Minister Keizo Obuchi, 60, who has been a close ally of Hashimoto since their joint debut in national politics in 1963, is considered among likely candidates to become prime minister. Seiroku Kajiyama, 72, a former chief cabinet secretary in Hashimoto's government, is regarded as another leading candidate.

The political turmoil in Japan following Sunday's election for the Upper House of parliament raised concerns in financial markets in Japan and overseas that vital policy steps needed to revive Japan's ailing economy could be delayed.

Hashimoto had been scheduled to leave for Paris on July 19 and to arrive in Washington on July 21 to brief President Bill Clinton the following day on measures he had planned to take to revive Japan's recession-hit economy. He alsowould have spent two days in New York.

Hashimoto told a news conference he was resigning as head of the ruling Liberal Democratic Party (LDP), a formality before stepping down as prime minister.

LDP Secretary General Koichi Kato told a later news conference that a new party leader would be elected on July 21 and formally installed as Prime Minister at a special parliamentary session on July 29. The session was scheduled before Hashimoto's resignation to discuss measures to revive the country's recession-hit economy.

In the Upper House poll for half of the chamber's 252 members, the LDP retained only 44 of the 61 seats it had held that were up for election.Hashimoto said he had rejected resignation offers from top LDP officials and asked them to stay in place until the leadership issue was settled.

Hashimoto, who came to power in January 1996, will become the first prime minister to resign after an election loss since the late Sousuke UNO in 1989, who was also brought down by an Upper Housesetback.

He will leave office as Japan's sixth longest-serving prime minister since World War Two.

Japan was reeling on Monday after the ruling Liberal Democratic Party (LDP) was dealt a stunning setback in Upper House elections and the question on everyone's mind was who would succeed prime minister Ryutaro Hashimoto.

There was a feeling of euphoria among many ordinary Japanese who believed they had registered their anger against Hashimoto's handling of the dismal economy, but also unease over whether the next man would be any better.Hashimoto said he would resign to take full responsibility for the election defeat and the sad state of the economy.

"When you sum it all up, it is all my responsibility,"Hashimoto said. LDP Secretary-General Koichi Kato said that Hashimoto would stay on until a successor was named, and gave July 21 as the date the party would meet to choose a new party head. Whoever is chosen as LDP's president becomes prime minister because of the majority it holds in the LowerHouse.

Major newspapers and analysts speculated that age-old factional considerations could take precedence as the LDP scrambled to choose Hashimoto's successor. If that formula holds true, then the next prime minister could be foreign minister Keizo Obuchi, who party insiders describe as an uninspiring, if genial party stalwart.

Obuchi is next in line in traditional factional rotation. The other name that comes to the fore is former chief cabinet secretary Seiroku Kajiyama, a more forceful personality who for some time has been nipping at Hashimoto's heels over his economic performance.

In the Byzantine world of Japanese politics, what will decide the succession in Kajiyama's favour are the party godfathers.

His key advantage is believed to be his backing by political godfather Yasuhiro Nakasone, a former Prime Minister. Nakasone's hand was strengthened, analysts said, when Hashimoto's camp was laid low.

Akira Oki, whose father is currently serving as environment minister, told Reuters thatKajiyama is the front runner. "He's the most acceptable to the LDP mainstream of the possible people," said Oki, who ran his father's campaign.

Aside from the succession, the other key question is whether the LDP will seek help from the opposition in forming a coalition government.

Technically, the LDP doesn't need to form a coalition because it still holds a majority in the more powerful Lower House, but analysts said it was likely to want a solid coalition partner to help get legislation passed more smoothly.