Japan's central bank has appealed to the government to quickly fix the country's ailing banks and thrown its weight behind plans to inject public money into the sector.

The Bank of Japan refused to consider a further relaxation of monetary policy, having kept interest rates effectively at zero for more than a year.

Instead, it said that the state should consider committing taxpayers' money to clean the sector up, assuming troubled banks cannot raise fresh funds through the markets.

Separately, the bank said it would be spending some 2 trillion yen (�10.3bn; $16.2bn) to buy shares from 10 of the biggest banks, as part of a previously-announced plan to boost their balance sheets.

But the news only served to deepen investor gloom.

Many fear the government lacks the will to push through effective bank reform, seen as vital if the Japanese economy is to climb out of its decade-long recession.

Bossing the banks

Banks and some politicians have resisted an injection of public money into the banking system, fearing it could result in a dramatic shake-up of management.

Mr Koizumi wants the banks sorted out quickly

But the idea has leapt to prominence since last week, when Prime Minister Junichiro Koizumi appointed a zealous reformer, Economics Minister Heizo Takenaka, as his top banking regulator.

Mr Takenaka has already floated a plan to rid banks of at least 52 trillion yen of bad loans.

Now, the Bank of Japan has said it is willing to act as the "lender of last resort" for the programme, effectively giving it the green light.

Still worried

Following the news, the yen, which has tottered in recent weeks, fell to a new three-year low against the euro in Japanese evening trade.

Although the Bank of Japan's news on its own share-purchase programme was more cheering, markets had already factored in the effects of the plan when it was announced in mid-September.

Friday was the culmination of a dismal week in the Japanese markets, seeing the Nikkei index hit a series of 19-year lows.

At odds

Also troubling is the persistent impression that not all the government is united in support of reform.

Finance Minister Masajuro Shiokawa, who reportedly felt sidelined by Mr Takenaka's appointment, had demanded that the Bank of Japan do something to free monetary policy - indirectly injecting cash into the banking system.

There has also been a separate row over the possibility of a supplementary government budget, called for by some officials but stoutly resisted by the prime minister.

The government still needs to put its seal on the reform plan and may produce something concrete by the end of this month.