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* Tax cuts should be mulled, senior ruling party official says
* JGB issuance to fund new stimulus plan unavoidable
* New stimulus plans should be ready by G20 summit
By Yuzo Saeki
TOKYO, March 12 (Reuters) - Japan should consider including tax cuts to boost demand in a planned stimulus package aimed at shoring up the economy, which is in its worst recession since World War Two, a senior ruling party official told Reuters on Thursday.
The official also said the size of the stimulus plan will be considerable and require new issuance of government bonds, though he did not specify the amount.
"If we are to take further tax steps, they should help boost demand," Hiroyuki Sonoda, the No.2 person in the ruling Liberal Democratic Party's policy research council, said in an interview.
"It (the economic package) will be a considerable size, so we cannot do it without issuing new government bonds," Sonoda said.
Ruling party officials and government ministries are seeking additional steps after a sharp contraction in gross domestic product in the last quarter of 2008 fuelled fears of an economic free-fall.
Japan, the world's second-biggest economy, has already set out plans to issue 33 trillion yen ($341 billion) in bonds to fund the budget for the fiscal year from April. It has announced two economic packages worth 75 trillion yen - parts of which were passed into law last month.
Adding to the pain are fears of a credit crunch as Japanese banks scramble to boost capital that has been depleted by a tumbling stock market.
Sonoda said the ruling parties were considering possible measures to prop up share prices, but added that unnecessary intervention in the stock market should be avoided. "Without some sort of measures...we may have the problem of a credit squeeze."
He also said Japan should be ready to present a general outline of the new package at a summit meeting of the Group of 20 rich nations and emerging powers slated on April 2.
Although details are yet to be finalised, Japanese media have reported that subsidies for purchases of eco-friendly cars and electronic appliances, as well as steps to expand high-speed Internet access are being considered.
Nippon Keidanren, the country's biggest business lobby, has called for quick implementation of an extra budget for the next fiscal year to offset a demand shortfall of more than 25 trillion yen caused by the economic crisis.
Sonoda echoed the proposal and said the government's measures should be aimed at bringing the economy back to the point to the point where it is no longer shrinking.
"It would be desirable that we make up for the shortfall both by spending tax money and inducing private-sector demand."
While the global financial crisis has dragged much of the rich world into recession, the contraction in Japan has been sharper than elsewhere due to its heavy dependence on exports and soft domestic consumption.
But whether Prime Minister Taro Aso can deliver a new economic package in time is in doubt as he battles a divided parliament and dissenters in his own party.
With Aso's public approval rating hovering at the lowest levels since he took office last September, ruling party lawmakers are jitterly about a looming election that must be held by October.
Government data on Thursday confirmed that fourth-quarter GDP marked the largest contraction since the first oil crisis in 1974, while economists say Japan is on course for its longest recession on record. (Additional reporting by Chisa Fujioka and Sumio Ito; Editing by Edwina Gibbs)