Former Prime Minister Hashimoto could succeed him

But Friday's announcement was the first time Mr Mori had directly said publicly that he would step down.

No date for his resignation was announced.

"I made up my mind to resign because I think it is necessary to tackle mounting issues both at home and abroad under a new administration," Chief Cabinet Secretary Yasuo Fukuda quoted Mr Mori as telling the Cabinet.

The apparent top-runner to replace Mr Mori is former Prime Minister Ryutaro Hashimoto, who served from 1996 to 1998.

Economic slowdown

Mr Hashimoto heads the LDP's largest faction and reportedly has the support of two other factions.

The changing of the guard comes as Japan is struggling to overcome a decade-long economic slowdown.

Stocks are slumped, unemployment is near a record high and officials say a long-awaited recovery has stalled.

The Tokyo stock market has slumped

The Cabinet on Friday announced an emergency economic package that set a two-year deadline for banks to dispose of their riskiest bad loans.

The debt load by one estimate is 12.7 trillion yen ($102bn).

Mr Mori's announcement was likely to be met with relief among LDP rank-and-file, who had widely feared that the premier's unpopularity would hurt the party in upper house elections scheduled for July.

Heavy criticism

Mr Mori took office in April 2000 after Prime Minister Keizo Obuchi suffered a fatal stroke.

His selection, in a closed-door meeting of LDP leaders, immediately came under heavy criticism.

He has also been attacked for comments recalling Japan's wartime emperor-worship and militarism, and for his decision to continue a round of golf after being told of the 9 February collision of a US submarine and a fishing vessel that killed nine Japanese.

His public support ratings have plunged below 10%, making him the second-most unpopular prime minister in Japan since World War II, after Prime Minister Noboru Takeshita, who resigned in 1989.