Real Video: Juliet Hindell reports from Tokyo in the wake of the financial shockwaves

Japan Leasing Corporation is an affiliate of the ailing Long-Term Credit Bank of Japan.

Company president Hiroaki Okamoto said: "Our efforts to restructure the company proved to be impossible...I deeply apologise to our creditors and for the effects this will have on the financial system."

The failure was the latest in a series of bankruptcies in a country which is struggling through its deepest recession in decades.

Tokyo-based credit research firm Teikoku Data Bank, seen as an authority on bankruptcies, said it would be the biggest ever in Japan.

'Good sign'

Instead of starting a market meltdown, share prices rose as analysts said the failure might even be good for Japan's ailing banking sector.

Prime Minister Keizo Obuchi - reputation at stake

Some said the collapse eliminated a potential sticking point in government efforts to pass a series of banking bills to clean up the country's bad-loan problems.

"This is a step forward, and is very positive in regard to passing the bank bills," said Koyo Ozeki, a bank analyst at Merrill Lynch Japan.

Japan Leasing owed 250bn yen ($1.8bn) to LTCB, the bank at the centre of reform debate.

The question of what to do with that debt had been a contentious issue.

The ruling party had supported an LTCB plan to write off its loans to Japan Leasing, but opposition parties would not support using taxpayer's money to bail out LTCB if it let its creditors off so lightly.

Political parties reached an agreement over the weekend on key financial reform bills, including a plan to temporarily nationalise LTCB.

That would make it impossible for LTCB to write off debts owed by affiliates, including Japan Leasing, which therefore had no choice but to file for bankruptcy.

Prime Minister Keizo Obuchi urged traders to be calm as markets opened, but his call was hardly needed.

Shares in Tokyo started higher and continued to climb throughout the day. The Nikkei index rose 185.53 points to close at 13,903.37, up 1.35%.

LTCB shares did not fare so well, opening sharply lower and briefly hitting an all-time low of 13 yen before rebounding slightly to 14 yen.

The shares were worth 24 yen at close on Friday.

Latest failure

Japan's worst previous bankruptcy was Crown Leasing, a lender with debts of 1.18 trillion yen ($8.86bn) that went under in April 1997.

But this does not take into account failures which happened without formal bankruptcy filings, such as the collapse of Yamaichi Securities.