(Adds confirmation of party agreement)

By George Nishiyama

TOKYO, Jan 30 (Reuters) - Japan's ruling and opposition parties on Wednesday narrowly averted a showdown in parliament over taxes that could have delayed passage of the government budget and triggered a snap election.

But the opposition Democratic Party of Japan (DPJ) is still committed to blocking a government plan to extend a controversial gasoline tax, and the clash could come to a head before the levy expires on March 31.

The Democratic Party, which leads an opposition bloc that controls parliament's upper house, wants to abolish the gasoline tax, charging that the cash raised has been used for wasteful spending and to serve vested interests.

Gasoline prices would be cut by around 25 yen (23 cents) a litre if the levy, first introduced in 1974, were not extended beyond the end of March.

"What can the ruling parties do ultimately when 70-80 percent of the people support our stance," Democratic Party executive Naoto Kan told party members after the agreement.

"They may think they can act unilaterally, but I want to ask your efforts to ensure that, with the power of public opinion, we can succeed in abolishing this provisional tax."

The ruling camp had been poised to ram through a stopgap bill to extend the tax by two months, prompting the opposition to threaten a parliamentary boycott and raising concern that approval of a successor to Bank of Japan Governor Toshihiko Fukui, who retires in March, might be stalled.

But the two sides instead reached a compromise in which the ruling parties withdrew the stopgap bill and the opposition, whose upper house majority means it can delay laws, implicitly agreed to vote on a 10-year extension of the tax by March 31.

"With this agreement, the lower house can debate the budget from tomorrow," Chief Cabinet Secretary Nobutaka Machimura told a news conference.

VOTER RESPONSE UNCLEAR

The ruling camp can override an upper house rejection by using its two-thirds majority in the lower chamber but invoking that rare procedure in this case might not have gone down well with voters.

It might also have prompted the opposition to withhold cooperation on less contentious issues, bringing parliament to a halt.

Democratic Party executives have hinted they might submit a non-binding but embarrassing censure motion against Prime Minister Yasuo Fukuda in the upper house in hopes of forcing him to call a snap election.

But Fukuda is wary of an early vote that would almost certainly see his ruling bloc lose its huge lower house majority that allows him to overrule the opposition.

There are also doubts, even within the Democrats, about whether the opposition is ready for an election.

No lower house election need be held until September 2009.

Some recent opinion surveys have shown that nearly half of voters do want to see power pass to the Democrats from Fukuda's Liberal Democratic Party (LDP), which has ruled the country for almost all of the past five decades.

But the Democrats, an amalgam of former LDP members and socialists holding differing views on a wide range of issues, face a high hurdle convincing voters they are ready for power.

Strong-arm tactics by the opposition could have led to a delay in passage of the budget for the next fiscal year starting in April, and risked angering voters worried about the possible effect on the economy at a time of concerns about the impact of the U.S. subprime problem. (Additional reporting by Linda Sieg and Chisa Fujioka; editing by Roger Crabb)

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