TOKYO - Unpopular Prime Minister Yasuo Fukuda resigned on Monday in an effort to break a political deadlock, becoming the second Japanese leader to resign abruptly in less than a year.

Fukuda, 72, has been struggling to cope with a divided parliament where opposition parties control the upper house and can delay legislation, while the world's No.2 economy slips towards a recession.

"If we are to prioritise the people's livelihoods, there cannot be a political vacuum from political bargaining, or a lapse in policies. We need a new team to carry out policies," Fukuda said.

"I thought it would be better for someone else to do the job than me."

Taro Aso, an outspoken, right-leaning former foreign minister and secretary-general of the ruling Liberal Democratic Party (LDP), is the frontrunner to succeed Fukuda.

Speculation has been simmering that the unpopular Fukuda might be replaced by the LDP ahead of a general election that must be held by September next year.

The dollar rose above 108 yen and the euro back up toward 158 yen on the surprise news, which caught traders off guard in a thinner market than usual because of a U.S. holiday.

UNCERTAINTY UNWANTED

"Markets don't like political uncertainty and this falls firmly into that camp. It doesn't help overall, even if he hasn't been particularly popular," said Jeremy Stretch, markets strategist at Rabobank in London.

Fukuda's resignation does not automatically mean an election. The LDP's new leader must win the support of parliament's lower house to carry on leading Japan's coalition government.

The bespectacled Fukuda, a moderate conservative who favours close ties with Japan's Asian neighbours, took office last September after his predecessor, Shinzo Abe, suddenly resigned after just a year in office.

"This is two prime ministers in a row ... The political vacuum will be at least two weeks, more like a month. Nothing will get done. It is quite likely that there will be pressure for the LDP to call an election as soon as possible," said Koichi Nakano, a political science professor at Sophia University.

"Certainly, this is not anything that can be condoned. It is unheard of, even by Japan's standards."

Analysts said the effect of his resignation would be to create the very political vacuum Fukuda said he wanted to avoid at a time when Japan's economy has either already entered, or is on the brink of a recession.

It also casts deep doubts over whether Japan can extend a naval refuelling mission in the Indian Ocean in support of U.S.-led operations in Afghanistan, enabling legislation for which expires in January.

Analysts said Fukuda's sudden resignation would likely be negative for Japanese shares and a bit of a minus for the yen's value against the dollar.

"I think Fukuda's resignation is negative for the stock market. It came before the government carries out its economic package, "said Fumiyuki Nakanishi, head of investment information at SMBC Friend Securities.

"It seems the process of selecting his successor, no matter who is chosen, will likely create discord among his party. Political confusion is a negative factor."

TAX CUTS NO HELP

Fukuda had seen his popularity sink after taking office on doubts about his leadership in the face of the divided parliament, where a feisty opposition is keen to force an early election for the lower house and oust the long-ruling LDP.

A government economic relief plan unveiled on Friday that included a promise of income tax cuts and about $16.5 billion in extra spending this year to ease the pain of rising prices, failed to revive his public support ratings.

A survey by the Nikkei business daily released on Monday showed support for Fukuda's cabinet fell nine points to 29 percent, back to levels before a cabinet reshuffle last month.

Concerns about Fukuda's leadership were deepened, analysts said, by a spat within the ruling bloc over the tax cuts, demanded by the junior coalition partner despite doubts within the dominant Liberal Democratic Party over their impact and worries about how to fund them.