* Cabinet approves record 88.5 trillion yen budget
* Budget will finance part of 12 trillion yen stimulus package
* Main opposition party defiant, calls for snap election
* Government says to carry out tax reform in 2011/12
* Overall spending up 6.6 pct, tax revenues down 13.9 pct (For more stories on the financial crisis click) (Add details)
By Hideyuki Sano and Isabel Reynolds
TOKYO, Dec 24 (Reuters) - Japanese Prime Minister Taro Aso tried to put a rocket under the stricken economy on Wednesday, announcing the country's biggest ever annual budget, as fear mounts that Japan faces a long recession.
However, the fate of the budget is clouded by Aso's sinking public support rates and weakening control over his Liberal Democratic Party, which analysts say is at risk of losing a lower house election that must be held by next September.
The budget for the fiscal year starting next April, along with two other extra budgets for the current year, will finance Aso's 12 trillion yen in fiscal stimulus programmes, which amounts to more than 2 percent of Japan's gross domestic product.
Ministers said the stimulus was as large as or even larger than steps adopted in other major economies. But it also meant Japan's primary budget deficit will nearly triple, making Tokyo's target of a surplus in two years almost impossible.
The global turmoil has already pushed much of the world's economy into recession, prompting policymakers to dish out trillions of dollars in bailouts and fiscal stimulus packages and drive borrowing costs ever closer to zero.
"Japan cannot avoid the tsunami of the world recession, but it can try to find a way out," Aso told a news conference, in which he illustrated the government's stimulus plans with a diagram of a three-stage rocket.
"The world economy is in a once-in-a-hundred-years recession. We need extraordinary measures to deal with an extraordinary situation," Aso said.
Still, doubts are growing over whether Aso has the political muscle to push the budget and other related bills through a divided parliament, which he has said he doesn't want to dissolve in view of the ailing economy.
While the ruling coalition has a huge majority to override most upper house decisions, it could lose that power if some ruling lawmakers were to defect, which no longer seems so unlikely.
When the main opposition Democratic Party, which controls the upper house with its smaller allies, submitted a bill calling for dissolution and an election, one former cabinet minister in the ruling party voted with them.
LARGE SHORTFALL
The 88.5 trillion yen ($980.6 billion) budget for the year starting in April represents a 6.6 percent rise in spending from the initial budget for the current fiscal year to March.
On the other hand, tax revenue is expected to fall 14 percent to 46.1 trillion yen from 53.6 trillion yen in the initial 2008/09 budget as the economy slumps and corporate earnings reel.
Toyota Motor, which has earned the biggest profits in Japan for the past few years, said this week it would post its first-ever annual operating loss on relentless fall in sales worldwide and yen's rise.
A Ministry of Finance survey showed on Wednesday big Japanese firms grew more pessimistic about business conditions and are cutting back on their capital spending plans.
"The data confirmed the deterioration in economic sentiment. Companies also revised down their outlook for January-March," said Azusa Kato, an economist at BNP Paribas.
"This could lead to a big downward revision in companies' capex plans. They may not just postpone investments but also reduce midterm spending plans," she said.
To offset a gaping hole in government revenue, Aso tapped a reservoir of government savings hoarded outside its general budget.
In recent years, Japan has often used so-called "hidden treasure" in its coffers -- reserves stored in obscure special accounts -- to avoid or limit rises in government debt issuance.
Despite that, Japan will also issue 33.3 trillion yen of new debt in 2009/10, nearly one-third more than the 25.3 trillion yen planned in the initial budget for this year.
This will add to more than 90 trillion yen of debt issuance to roll over maturing debt.
Markets have taken the rise in JGB issuance in their stride, focusing more on the deterioration in the economy. The yield on 10-year JGBs fell to 3 1/2-year low on Friday.
But Japan's primary budget deficit -- its balance outside debt issuance and servicing -- increased to around 13 trillion yen from around 5 trillion yen.
A surplus here would enable a reduction in debt outstanding. Japan has long pledged to turn the balance into a surplus by March 2012, but the economic malaise makes that look unlikely.
To show it has not given up on fiscal belt tightening, though, Japan said it would carry out tax reforms including the consumption tax -- code for a hike in the sales tax -- in 2011.
But the decision came only after bickering over whether it should also say the government would make necessary legal changes in tax law in 2010, a phrase that was included in an earlier draft but dropped in the final statement. (Additional reporting by Tetsushi Kajimoto; Editing by Hugh Lawson)