"They've put off how to recapitalise weak banks -- and all of the rest is much ado about nothing," said James McGinnis, bank analyst at Dresdner Kleinwort Benson in Tokyo. "The key point is the method by which they do it (inject capital), because that will determine the extent of pain for shareholders and how much capacity they leave in the banking system."

Japanese media said on Monday that marathon talks over the weekend among the ruling Liberal Democratic Party (LDP) and two opposition groups -- the Democrats and the Buddhist-backed Heiwa-Kaikaku bloc -- had agreed on the following points:

Temporarily nationalise the ailing Long-Term Credit Bank of Japan Ltd (LTCB), force it to write off problem loans and sell off healthy assets to the highest bidder-- hoped by the government to be Sumitomo Trust & Banking Co Ltd.

Handle other failed banks through nationalisation, liquidation or by turning them into state-run "bridge banks" until they can be purchased by other institutions.

Allow the government to temporarily nationalise failed banks or banks at risk of being unable to pay depositors.

Force the finance ministry to share financial planning power with a new Financial supervisory committee. Abolish an existing 13 trillion yen bank recapitalisation fund and develop new plans "as soon as possible" to help troubled banks before they collapse.

Allow public fund injections into "receiver banks" that take over failed banks. The new pact comes just over one week after the two sides had ostensibly resolved the same dispute, only to see bickering immediately resume over what the deal meant.

Last week's wrangling and preceding deadlock have left analysts wary of putting too much faith in the latest pact and keen to see what concrete steps are actuallytaken.

"There has been too much talk -- I need to see the proof," said one economist. Such scepticism aside, analysts also said the fate of the economy as well as the banking system hinged largely on what steps were thrashed out to handle "weak but solvent banks".

The United States, worried about systemic risk should big banks collapse, has been campaigning to get Japan to use a hefty dose of public funds for fragile top-ranking banks.

The LDP has been singing the same tune, but anything that smacks of using tax money to bail out banks can be politically explosive, a point which the opposition is keenly aware of.

Many analysts, however, argue that such steps are needed not only to calm financial jitters but also to keep Japan's credit crunch from worsening and sending the economy -- already mired in recession -- into a dangerous deflationary spiral.

"I don't think we should rescue banks, but we need to recapitalise, otherwise the economy will shrink further and the Japanese economy will be dead,"said Yukiko Ohara, bank analyst at Morgan Stanley in Tokyo, adding that capital infusions should be accompanied by forcing banks to restructure drastically.

Some analysts worry that if the opposition insists on conditions for public fund infusions which are too stringent, the result could well be more big bank failures.

"If so, the credit crunch will get worse," Ohara said, noting that the nationalisation of LTCB and the failure of its non-bank affiliate Japan Leasing Corp, which filed for court protection from creditors on Sunday, would force other banks to tighten their lending stance.

Given such worries, the opposition -- or part of it -- could end up agreeing to some form of public fund injection for solvent big banks, some analysts said.

"The opposition talks tough, but there has to be a `too big to fail' doctrine," McGinnis said. "The tough talk has to give way to pragmatism when you're talking about major city banks."

Heiwa-Kaikaku member Chikara Sakaguchi told reporters that the basicprinciples of the new scheme -- such as the extent to which injections of public funds would be allowed for weak banks -- have not been settled.

Sakaguchi also said it would be difficult to enact the new framework in the current session of parliament, which is set to end on October 7, unless the session were extended.

LDP policy chief Yukihiko Ikeda, meanwhile, said that if the ruling and opposition parties failed to agree on a new scheme, the LDP would draft one on its own -- possibly later on Monday, Jiji news agency reported.

Quoting another LDP executive, Jiji said the LDP might try for a deal with the Heiwa-Kaikaku bloc if no agreement with the Democrats could be reached.