* Yukio Hatoyama voted in as Japan's new prime minister
* Hammering out a new budget tops new govt's agenda
* New PM to smooth ties with Washington next week
* New finance minister backs yen strengthening
* Campaign promises, and how to pay for them, a key issue
By Linda Sieg and Chisa Fujioka
TOKYO, Sept 16 (Reuters) - Japan's Yukio Hatoyama was voted prime minister by parliament on Wednesday, bringing to power an untested government pledged to radically change how the nation is run and make domestic demand, not exports, the engine of growth.
Hatoyama, whose Democratic Party of Japan (DPJ) trounced the long-ruling Liberal Democratic Party in an election last month, faces pressure to make good quickly on campaign promises to focus spending on consumers, cut waste and reduce bureaucrat control over policy.
He must also try to ensure that a nascent recovery from Japan's worst recession since World War Two stays on track despite an already huge public debt.
Managing ties with close ally the United States while charting a more independent course will also be a priority.
The U.S.-educated Hatoyama, 62, wearing his lucky gold, silver and blue striped tie and signature pocket handkerchief, stood and bowed after the vote.
"I have mixed feelings of excitement about changing history and the very heavy responsibility of making history," said Hatoyama, whose party ousted the LDP for only the second time since its founding in 1955.
"The fight begins now," he said as he left home earlier.
New Chief Cabinet Secretary Hirofumi Hirano unveiled Hatoyama's cabinet line-up, a delicate balance of former Liberal Democrats, ex-socialists and younger conservatives that will have to hit the ground running.
"The DPJ has got to come up with an agreed list of priorities quickly, because its manifesto is just a long laundry list," said Koichi Nakano, a professor at Sophia University in Tokyo.
Hatoyama's choice of veteran lawmaker Hirohisa Fujii, 77, as finance minister has soothed some analysts' concerns about government spending and the debt burden, but the former finance mandarin moved currency markets even before he was sworn in.
The yen rose 0.5 percent against the dollar after he told reporters a strong yen had merits for Japan's economy and that recent currency moves were not rapid.
Hatoyama's choice of Shizuka Kamei, the outspoken head of a tiny coalition partner and an opponent of market-friendly reforms, as minister for banking and markets regulation sent bank shares lower with comments on lending.
INDEPENDENT DIPLOMACY, BUDGET BATTLES
Hatoyama's vow to steer Japan on a more independent diplomatic course has sparked concerns about possible friction with top ally the United States ahead of his diplomatic debut there next week, where he will meet President Barack Obama.
The U.S.-educated Hatoyama is expected to reassure Obama over ties and perhaps postpone calls for re-negotiation of agreements on U.S. troops stationed in Japan.
On his return, Hatoyama faces the urgent task of drafting a budget for the fiscal year from next April 1 and finding ways to plug holes in this year's budget caused by sliding tax revenues as Japan struggles out of a recession.
The new government must balance the need to nurture a recovery and fund its consumer-friendly spending plans with concerns about a public debt heading towards 200 percent of GDP.
"People aren't fools. We know that money has to come from somewhere but I just don't know where," said 50-year-old businessman Eiji Shimagami.
The Democrats have promised to scrap public works projects and other programmes they consider wasteful and use freed up cash to stimulate consumption through measures such as payouts to farmers and families with children, and ending highway tolls.
The economy returned to slow growth in the second quarter but still suffers a record high jobless rate and record deflation.
The Democrats have vowed to centralise decision-making in the cabinet, and a new National Strategy Bureau will be tasked with reforming what the Democrats say is a cumbersome policy-making system that relied heavily on recommendations from bureaucrats.
That means the finance minister will likely share responsibility for the budget with former Democratic Party leader Naoto Kan, who will head the new bureau.
Kan, who battled bureaucratic corruption as health minister in the 1990s, is seen as a pragmatic force for change.
Hatoyama must also hold together an awkward coalition with the two tiny parties whose support he needs in parliament's upper house, and may face fall-out from money scandals looming over him and party No.2 Ichiro Ozawa.
Besides conservative People's New Party head Kamei, he appointed Social Democratic Party leader Mizuho Fukushima to take charge of consumer affairs and policies to boost Japan's very low birthrate. (Additional reporting by Isabel Reynolds, Yoko Kubota, Yoko Nishikawa and Colin Parrott; Writing by Linda Sieg; Editing by Jeremy Laurence)