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* Finmin Kan sets cap on next year's new bond issuance
* Kan: New bond issuance shouldn't top 44.3 trln yen
* PM distances himself from Kan's calls for debt cap
* Sengoku: Japan needs to draw lessons from Greece (Adds PM comments)
By Stanley White and Leika Kihara
TOKYO, May 11 (Reuters) - Japanese Prime Minister Yukio Hatoyama undercut his finance minister's efforts to cap new bond issuance for the next fiscal year, even as Greece's debt crisis adds pressure on Tokyo to rein in its huge public deficit.
Finance Minister Naoto Kan said on Tuesday he will try to ensure that next fiscal year's new bond issuance does not exceed this year's record 44.3 trillion yen ($474.7 billion).
But Hatoyama said the government has not made a formal decision on whether to cap debt issuance, reinforcing views in the market that Kan's warnings about Japan's worsening public finances will go unheeded.
"This has not been decided by the government and I think that the Finance Minister was expressing his views. This idea is not mine," Hatoyama told reporters on Tuesday.
A senior ruling party official also told Reuters that he did not share Kan's view that the government should set a cap on new debt issuance.
Financial markets have been shaken up by debt problems in the euro zone, prompting downgrades from ratings agencies, who have also threatened to cut Japan's sovereign ratings if it doesn't show a strong commitment to cutting debt in a mid-term fiscal plan expected next month.
Analysts are sceptical whether Kan or National Strategy Minister Yoshito Sengoku, who also urged greater fiscal caution, will get support for spending cuts or tax hikes from others in the government ahead of upper house elections expected in July.
"Fiscal hawks like Kan and Sengoku seem to want to curtail new debt next fiscal year," said Naomi Hasegawa, senior strategist, Mitsubishi UFJ Morgan Stanley Securities in Tokyo.
"But that seems to be their personal preference, rather than the government's stance, given the lack of leadership in this government."
Support for Hatoyama's government is languishing around 20 percent, boding ill for his party's prospects in the upper house elections, and some analysts doubt he will want to send signals about trimming spending for fear of alienating voters.
Kan, speaking at a news conference, warned against complacency, saying that with markets becoming increasingly sensitive to sovereign risk, Japan needed to come up with a sustainable long-term fiscal policy.
"As the situation in Greece and the euro zone show, when markets lose confidence in a country, it's not just about fiscal conditions becoming severe. It poses huge damage to people's livelihoods," said Kan, who is also deputy prime minister.
"Markets are becoming sensitive to sovereign risk so in order to prevent this from happening we need to make as much effort as possible so that issuance does not exceed 44.3 trillion yen."
The government may consider capping some areas of spending when it crafts the state budget for the year beginning in April 2011, Kan said.
GREATER SENSE OF URGENCY
Concerns about debt burdens in European countries have rattled financial markets globally, and European Union finance ministers, central bankers and the International Monetary Fund agreed an emergency rescue package worth about $1 trillion in marathon talks at the weekend.
Financial markets had started to punish other euro zone debt of members with bloated budgets such as Portugal and Spain.
Japan has been immune to this kind of market scare despite the balance of its public debt being the worst among G7 nations, mainly because of its huge private savings and the fact government debt is held mostly by domestic investors.
Its outstanding debts rose to a record 882.92 trillion yen as the fiscal year ended in March, which is almost twice the size of its gross domestic product, according to finance ministry data.
Sengoku, in charge of crafting a long-term strategy for the state budget, also said markets may start reacting to Japan's high outstanding debt, depending on the current account balance.
"Japan needs to draw a lesson from Greece's problems and to take steps on fiscal discipline with a stronger sense of crisis than before," he told a news conference on Tuesday.
Japanese government bonds shrugged off the comments and yields rose ahead of an auction of 10-year debt.
The Democratic Party-led government's ambitious spending agenda has drawn warnings from ratings agencies.
Bond yields and credit default swap spreads ground higher last year as the government compiled a record $1 trillion budget for the fiscal year starting in April 2010.
Tax revenues are expected to make up less than half the government's 2010/11 budget, falling behind new debt borrowing for the first time since World War Two for an initial budget, after a deep recession that devastated company profits. (Additional reporting by Rie Ishiguro, Chisa Fujioka; Editing by Joseph Radford)