Dual images dilemma for Japan's ruling party - Ozawa

TOKYO (Reuters) - Backroom fixer or architect of reform -- conflicting images of powerful Japanese lawmaker Ichiro Ozawa have competed during the nearly two decades since he shook up the political scene by bolting from the ruling party.

Now those dual images are posing a dilemma for Prime Minister Yukio Hatoyama's Democratic Party after Ozawa vowed to stay in his No. 2 party post despite a fresh funding scandal, less than a year after he stepped down as party leader over a separate affair.

A combative Ozawa, 67, pledged on Saturday to stay on as party secretary-general and do battle with prosecutors after their arrest of three aides in connection with the new scandal.

"Of course he won't step down. He thinks he is engineering a political revolution," said a veteran Japanese journalist.

Ozawa has repeatedly denied any intentional wrongdoing. The scandal is casting doubts over whether the Democrats, who swept to victory in an August election that ended more than 50 years of almost unbroken rule by the Liberal Democratic Party (LDP), can win a majority in a mid-year upper house election.

Despite their huge grip on the lower house, the party needs a majority in the upper house to reduce reliance on two tiny allies and avoid policy deadlock, since the chamber can delay bills.

The stocky, pugnacious Ozawa has long been a paradox as well as a near-obsession for Japanese media, whom he is more inclined to dodge or chastise than cultivate with media-savvy tactics.

A protege of Kakuei Tanaka, a former premier who built Japan's postwar political regime of pork-barrel, party factions and vested interests, Ozawa has also been an advocate of change.

"He learned his politics at the feet of Kakuei Tanaka ... but he was the one who split the LDP and was instrumental in creating an alternative," said Chuo University professor Steven Reed.

TOUGH CHOICE FOR DEMOCRATS?

Although Ozawa was forced to step down as Democratic Party leader just months before last year's election over a separate scandal, many credit him with engineering its huge win and say his skills are needed to ensure victory in the upper chamber.

That could pose a tough choice for the Democrats between seeing voter support fall if Ozawa stays, or losing his undisputed electioneering talents if he goes.

Hatoyama has seen his popularity fall to around 50 percent from initial highs of over 70 percent on doubts about his leadership and many voters believe he is under Ozawa's thumb.

Still, some said it was too soon to assume Ozawa would have to resign or risk depriving the Democrats of an outright win, especially since the shattered LDP looks ill-placed to benefit.

"It might be a high risk operation to try to fight the prosecutors," Reed said. "But if they can say that the prosecutors lack transparency or paint them as bureaucrats who are preventing reform, they might be able to pull it off."

Once an LDP rising star, Ozawa left the party in 1993 and helped briefly to oust it. That same year he outlined his policies in a book, "A Blueprint for a New Japan," calling for a bolder security role and reforms to reduce bureaucratic control.

His small Liberal Party merged with the Democrats in 2003 and three years later, he took the helm, only to resign over the earlier scandal last May.

A skilled player of the Japanese chess-like game of "Go," Ozawa has been dogged by a reputation as an autocratic loner.

He jolted the political scene in late 2007 by discussing a "grand coalition" with then-prime minister Yasuo Fukuda to break a policy deadlock, a proposal roundly rejected by his party.

(Editing by Jeremy Laurence)