By Yoshifumi Takemoto

TOKYO (Reuters) - Japan's ruling party will make proposals this month on how to handle the embattled operator of the crippled Fukushima nuclear plant, including the possible break-up of the giant utility, a senior party policymaker said on Wednesday.

Tadamori Oshima, head of the Liberal Democratic Party's task force on reconstruction after the 2011 earthquake and tsunami that wrecked the reactors at the Fukushima plant, told Reuters the government needs to do more in dealing with floods of contaminated water at the plant and decommissioning the facility.

He declined to express a clear opinion on the controversial question of whether to break up Tokyo Electric Power Co (Tepco), but said: "It's time for us to make a decision, not in order to save Tepco, but to pave the way toward reconstruction."

The current set-up is not working, Oshima said in an interview, as progress is hindered by Tepco remaining in charge of all the work.

Tepco has lost $27 billion since the disaster at its Fukushima Daiichi nuclear plant and faces massive liabilities as it decommissions the facility, compensates tens of thousands of evacuees and pays for decontamination of an area nearly the size of Connecticut.

Prime Minister Shinzo Abe has promised that the government would take primary responsibility for containing the contaminated water at Fukushima, telling the world the "situation is under control."

At the Fukushima plant, some 800 tons of groundwater flow into the basements of the wrecked reactor buildings every day, mixing with highly radioactive water used to cool melted fuel rods. After months of denials, Tepco in July admitted contaminated water was flowing into the nearby Pacific Ocean. It also since found that 300 tons of highly radioactive water had leaked from one of hundreds of hastily-built storage tanks. Last week, Tepco said another 430 liters of water overflowed from another tank.

In the latest mishap, six Fukushima workers were exposed to a leak of highly radioactive water after one of them mistakenly detached a pipe.

HEATED DEBATE

The government effectively nationalized Tepco last year with a taxpayer-funded rescue. But there is heated debate over direct government involvement in the company and whether to split it up, such as by spinning off the Fukushima clean-up and letting the remainder of Tepco focus on its traditional business of generating electricity for millions of homes and businesses in the Tokyo area.

Oshima, a former LDP vice president, reportedly last month proposed breaking off the function of decommissioning the wrecked Fukushima plant - a process that is expected to take at least 30 years and cost more than $100 billion. He declined to comment on what he proposed, saying it was a private letter to Abe that wasn't meant to be disclosed.

There is a push to enact a "special measures law" that would let the government take a more direct role, as it is now authorized only to participate in research and development on the water issue.

Oshima said careful negotiations are under way with a wide variety of parties - including government ministries and the LDP's junior coalition partner, New Komeito - on such issues as stronger government involvement and potential reorganization.

Tepco has said it is not in a position to comment on its future structure, and aims to return to profitability this financial year.

The bureaucracy is pushing back, government officials say. The Finance Ministry fears that breaking up Tepco would hand another large bill to taxpayers, while the Ministry of Economy, Trade and Industry (METI), which regulates electric utilities, worries a break-up could have ripple effects through the industry.

METI Minister Toshimitsu Motegi said this week that a special measures law was not needed as the current legal framework allows the government to be more involved in Tepco.

(Additional reporting by Kentaro Hamada and Mari Saito; Writing by William Mallard; Editing by Ian Geoghegan)