TOKYO, June 17 (Reuters) - Japanese prosecutors should reopen a case over suspected illegal fundraising by a minister's support group, a judicial panel ruled on Wednesday, in a move that could hurt the struggling prime minister before an election.

In a legally binding ruling, the panel said prosecutors should reconsider their decision not to indict ruling party lawmaker Shinya Izumi, who was in charge of accounting at an organisation supporting trade minister Toshihiro Nikai.

The prosecutors' decision to drop the case had been criticised by some media as biased, since an aide to the former opposition leader was charged with taking illegal donations from the same construction company.

The scandal cost the Democratic Party leader his job ahead of an election at which it has a good chance of wresting power from Prime Minister Taro Aso's long-ruling Liberal Democratic Party (LDP).

The change in leader restored the Democrats' poll ratings in the run-up to the election, which many expect in August.

The panel said Mikio Kunisawa, a former president of Nishimatsu Construction, should be prosecuted over suspected false reporting relating to more than 8 million yen in donations to Nikai's political support group.

Kunisawa has already been indicted over the case relating to the opposition staffer but his prosecution over the ruling party case had been suspended.

"There should be a prosecution to maintain balance," the panel of lay people said in its ruling. "The people will find it easier to accept if everything is explained in open court."

Under a new law that took effect in May, the prosecutors must indict suspects within three months of being directed to do so by a review panel of 11 people chosen at random from the electoral roll. If prosecutors do not pursue the case, the courts can appoint a lawyer to do so in their place.