Voter support for Japanese Prime Minister Yukio Hatoyama and his party has fallen due to a funding scandal linked to his powerful No. 2 party executive, three media surveys showed on Monday, raising the risk of a policy stalemate.

Opposition parties have threatened to boycott parliamentary debate on an extra budget to prop up the economy if the ruling Democratic Party dodges questions about the scandal ensnaring its secretary-general, Ichiro Ozawa.

The affair is adding to political uncertainty weighing on investor sentiment. In the short-term, the main risk for investors is a delay in enacting the extra budget as well as the annual budget for the year from April. In the longer term, the risk is policy stalemate or confusion.

The scandal could also threaten the Democrats' chances of gaining a majority in a mid-year election for parliament's upper house which they need to win to pass legislation smoothly.

For the first time since Prime Minister Yukio Hatoyama took office in September, more voters disapprove of his government than support it, a survey by Kyodo news agency showed.

Support for Hatoyama's cabinet, which had already slid due to voters' doubts about his leadership, slipped to 41.5 percent, falling below the disapproval rating of 44.1 percent.

That was down from 50.8 percent the previous month and from initial highs above 70 percent.

Surveys by the Asahi and Yomiuri newspapers also showed voter support for Hatoyama's government has dropped to 42 and 45 percent, respectively, nearing the disapproval ratings.

Prosecutors have arrested three current and former Ozawa aides on suspicion of improper reporting of political donations.

Japanese media say they are probing the source of funds and suspect construction firms seeking government contracts were involved.

Hatoyama said on Saturday he would back Ozawa's decision to remain in his key post and urged him to fight on.

That stance has drawn fire from Japanese media and the opposition as suggesting bias against the prosecutors, but the premier reiterated he believed Ozawa's assertion of innocence.

Asked whether Ozawa should respond to prosecutors' requests to answer questions voluntarily, Hatoyama said on Monday: "I would like for Secretary-General Ozawa to decide himself and give an explanation."

Equally disturbing for the government, the percentage of those planning to vote for the ruling party in the upper house election fell to 28.4 percent in the Kyodo poll, against 24.7 percent who said they would opt for the opposition Liberal Democratic Party (LDP).

But 70 percent of respondents to the Yomiuri survey said Ozawa, who stepped down as party leader last year over a separate scandal, should resign from his No. 2 post.

Finance Minister Naoto Kan urged parliament on Monday to pass an extra budget for this fiscal year to support a fragile economy, in the hope of avoiding a return to recession.

"Japan's economy is picking up but it lacks self-sustaining strength, and the situation remains severe," he said in his first speech as finance minister to the lower house of parliament.

The Democrats and their allies could ignore any opposition boycott, but doing so may further erode voter support as the public might see them as high-handed and trying to avoid answering questions about the funding scandal.

Political uncertainty weighed on investor confidence, with investors worried the funding scandal might hamper the budget debate, but the impact has so far been limited.

"Markets seem to be taking a wait-and-see approach so far as Ozawa's funding scandal is unlikely to prevent the passage of planned budgets in the parliament and thus would not raise the risk of the economy worsening, at least in the coming month or two," said Seiji Adachi, senior economist at Deutsche Securities.

The Democrats swept to power in an August election that ended more than half a century of nearly unbroken LDP rule, pledging to refocus spending on consumers and cut wasteful spending to help rein in Japan's ballooning public debt.

But they need to win an outright majority in parliament's less powerful upper chamber to break free of two small allies, who often disagree on policy, and ensure smooth passage of laws.