TOKYO - Japanese Prime Minister Taro Aso plans to call a general election on August 30, a top ruling party official said on Monday, despite the prospect that his long-ruling conservative party is headed for a historic defeat.

A Democratic Party victory in the national election would end half a century of nearly unbroken rule by the business-friendly Liberal Democratic Party and raise the chance of resolving political deadlocks as Japan tries to recover from its worst recession since World War Two.

The decision to call the vote, which must be held by October anyway, follows a crushing loss for the unpopular Aso's ruling party in a Tokyo election on Sunday that was seen as a barometer for the national poll.

Parliament's lower house would be dissolved next week to set the stage for the election, Hiroyuki Hosoda, secretary-general of Aso's LDP, told reporters.

Moves within the LDP to replace Aso had been expected to grow after the party and its junior partner lost their majority in the Tokyo assembly but Hosoda said he saw no such moves now.

Aso's two predecessors each quit after less than a year in office and some analysts said it was too late for another change.

Tokyo's Nikkei share average slid 2.6 percent to its lowest close in eight weeks, hurt by the growing political uncertainty.

Some financial market experts were disappointed the election would not be held sooner. "The market has started factoring in a change of government, but the longer the wait, the more the political and economic uncertainty grows," said Susumu Kato, chief economist at Calyon Capital Markets Japan.

FOCUS ON CHANGE

Chaos has gripped the LDP, with Aso's critics inside the party speaking of ditching him while the party's campaign strategist had tried to draft an ex-comedian for its ticket.

"If things go on as they are, this will be a severe defeat," said Katsuhiko Nakamura, director of research at think tank Asian Forum Japan.

"The focus is on who can change the situation, and the LDP will have trouble convincing people they can change things."

The Democrats have pledged to pay more heed to the rights of consumers and workers than those of corporations and to pry policy-making decisions out of the hands of bureaucrats as a way to reduce wasteful spending.

An opposition win in the general election would smooth policy implementation by resolving deadlocks in parliament, where the opposition controls the upper house and can delay bills.

Some analysts say the Democrats' large spending plans could inflate public debt and push up government bond yields, although the LDP has also passed massive stimulus spending.

"Even if the Democrats were to take power, they may be forced to pursue populist policies until next year's upper house election, meaning that fiscal discipline could be pushed back, which would be negative for the bond market," said Naomi Hasegawa, senior fixed income strategist at Mitsubishi UFJ Securities.

Hosoda said the LDP would stress its steps aimed at rescuing the economy from recession, but some voters were unimpressed.

"I want a change from deadlocked politics," said Yuriko Takahashi, 58, a part-time retail worker. "We are still in the midst of a recession. I don't think the LDP has done much."

The Democratic Party, seeking to capitalize on the LDP's woes, submitted a no-confidence motion against Aso's cabinet to the lower house -- expected to be voted down -- and an embarrassing but non-binding censure motion to the upper chamber.

The opposition party does, though, have a headache of its own. Party leader Yukio Hatoyama has apologized for the fact that some people listed as his political donors were dead.

Hatoyama took over as party leader in May after his predecessor stepped down to keep a separate fund-raising scandal from hurting the party's chances at the polls.

(Additional reporting by Isabel Reynolds, Yumi Otagaki, Writing by Linda Sieg, Editing by Nick Macfie)