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By Tetsushi Kajimoto and Shinji Kitamura

TOKYO (Reuters) - Japan's government is ready to compromise with the opposition to pass a crucial bill needed to prevent a crippling funding shortfall, Vice Finance Minister Tsutomu Okubo said on Thursday, urging the opposition to spell out terms.

The main opposition Liberal Democratic Party (LDP) has been pressing Prime Minister Yoshihiko Noda to call an early election, using the funding issue to beggar the government into submission at a time when the world's third largest economy stands at risk of sliding into recession.

"If we were to choose one bill that we wanted to enact in the current session, it would be the deficit bond bill," Okubo told Reuters in an interview. "The situation could turn into a Japanese fiscal cliff."

That term was coined to describe massive tax hikes and cuts to public spending that could hit the United States at the start of 2013 if the Congress fails to act.

To prevent something similar happening in Japan, Noda called an extra parliament session running until November 30 to pass the bill to issue deficit-financing bonds, but needs backing from the opposition, which controls the upper house and can block legislation there.

Otherwise, Japan could run out of money by the end of this month and would have to stop debt auctions in December. The government is already delaying some spending on tax grants to rural governments, some government affiliate agencies and univesities to avoid running out of cash.

Without more funds, the government would have to dip into reserves to service debt and avoid a default, and could be forced to cut benefits to unemployed, salaries for civil servants, and transfers to rural goverments.

Credit ratings agencies have warned over the dangers posed by political deadlock. Moody's on Thursday reiterated its concern with the prolonged standoff that left the government unable to borrow 38.3 trillion yen ($479.17 billion) needed to cover the budget deficit and finance about 40 percent of its spending for the fiscal year ending in March 2013.

Okubo said passage of the bill was the utmost priority for the government, aware that a failure to do so would have grave consequences for markets and the economy.

"I want ruling and opposition parties to sit at a negotiating table and come up with concrete proposals. We should then quickly respond after looking at those proposals," Okubo said.

The opposition had forced Noda in August to promise an election "soon". But with his Democratic Party of Japan (DPJ) scoring poorly in opinion polls, Noda has been coy on the exact timing of an election that must be held by August 2013.

Some opposition lawmakers have suggested a compromise was possible if the government met other demands, such as cutting some spending in the current budget.

Okubo said it was premature to make any response.

"I'm aware some people say we should tweak the budget to cut spending, but the Liberal Democratic Party as a whole has not made such a proposal yet. We cannot respond until we look at a concrete proposal."

STABILITY

Speaking ahead of a Group of 20 finance chiefs' November 4-5 meeting in Mexico, Okubo also said fiscal problems of Japan and the United States along with Europe's sovereign debt crisis and the slowdown in emerging market economies all posed major risks to global economy.

While Tokyo has not intervened in the currency market for nearly a year, Japan has long argued that one of the unwanted side effects of the euro crisis was capital flight to the relative safety of the yen, driving it beyond levels that its exporters can cope with.

"If there's a discussion (at G20), we want to maintain the need for currency stability as excess volatility and disorderly movements hurt the economy," Okubo told a news conference later on Thursday, after speaking to Reuters.

The G20 meeting was also likely to discuss the impact of U.S. financial regulation, including a so-called Volcker rule setting limits on banks' own-account trading, Okubo told Reuters.

Turning to the Bank of Japan's monetary easing earlier this week and an unprecedented joint statement with the government pledging continued efforts to battle deflation, Okubo said the move demonstrated resolve to beat deflation and deal with a strong yen.

Due to a decline in long-term yields, Obuko said there was no pressing need for the BOJ to consider extending maturities of bonds bought under its asset purchase program, something he had urged earlier. But, he added that it could remain a an option in the longer-run.

He did, however, recommend that the central bank bought bonds of utilities as part of its corporate debt purchases.

"I personally hope that the BOJ will steadily buy bonds issued by electricity companies, which are the weakest but most influential in the corporate bond sector," Okubo said.

($1 = 79.9300 Japanese yen)

(Editing by Simon Cameron-Moore)

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