Calls have built up in Hatoyama's Democratic Party for him to step down to revive the party's fortunes ahead of an election for the upper house of parliament expected on July 11 that it must win to smooth policymaking.

With tears in his eyes, Hatoyama told a party gathering both he and party secretary-general Ichiro Ozawa would resign their posts.

Analysts have tipped outspoken Finance Minister Naoto Kan as the likely successor to Hatoyama, who quits after just eight months on the job.

Political rows, including the recent departure of a tiny leftist party from the ruling coalition, has distracted the government as it thrashes out a plan to cut huge public debt and a strategy to engineer growth despite a fast-aging population.

Hatoyama becomes the fourth straight Japanese leader to leave office after a year or less in office.