Japan has said it will postpone sending troops to join the US-led coalition in Iraq until next year because of the worsening security situation.
Koizumi backs the US, but his coalition partner does not
Tokyo had hoped to deploy its first troops before the end of the year, but now says conditions are too unstable.
The move came after at least 27 people died in a suicide bomb attack on the Italian police headquarters in the southern town of Nasiriya.
Japan's constitution bans its forces from engaging in offensive operations.
Prime Minister Junichiro Koizumi, a staunch supporter of the war in Iraq and the subsequent occupation, received parliamentary approval last July to send up to 1,000 troops to Iraq.
But BBC Tokyo correspondent Jonathan Head says that since then, as the security situation has deteriorated, an already uneasy Japanese public has turned against the policy.
The proposed area of deployment for the Japanese troops was Nasiriya, the scene of Wednesday's bombing.
In last week's Japanese general election, the opposition Democratic Party gained 40 seats after campaigning against the deployment.
Mr Koizumi's Liberal Democratic Party lost seats and is now more dependent on its partner in government, the Komeito Party, which is also opposed to sending the troops.
Announcing the decision to delay the deployment, Chief Cabinet Secretary Yasuo Fukuda told a news conference: "There should be a situation where our country's Self-Defence Forces can conduct their activities fully.
"But to our regret, the situation is not like that."
Our correspondent says that although the US Defence Secretary, Donald Rumsfeld, is due in Japan this weekend for an official visit, he is unlikely to put any pressure on Mr Koizumi for fear of aggravating his difficulties.
Meanwhile, South Korean President Roh Moo-hyun has agreed to dispatch no more than 3,000 troops to Iraq.
The United States had reportedly asked South Korea for more than
5,000 combat troops.
The Bush administration is seeking to accelerate the handover of power in Iraq to an Iraqi-led government after a period that has seen dozens of American troops killed in the country in guerrilla-style attacks.
In Nasiriya itself, Italian Defence Minister Antonio Martino has visited Italian soldiers wounded in Wednesday's attack, which saw an explosives laden truck detonated outside the police building.
Italy lost 18 of its nationals - 12 carabinieri military police, four soldiers
and two civilians.
Nine Iraqi civilians died in the attack and more than 80 were wounded - 11 of them seriously.
BBC defence correspondent Paul Adams says that southern Iraq's generally welcoming Shia Muslims had led foreign troops to feel much more at ease than US troops in the Sunni areas - which were more loyal to deposed President Saddam Hussein.