TOKYO, Sept 17 (Reuters) - Japan's ruling and opposition parties raced against time on Thursday to thrash out a compromise over how to fix the nation'sailing banking sector.

The government is keen to do a deal on the touchy topic before Prime Minister Keizo Obuchi leaves for the United States on Sunday.

Obuchi is set to meet U.S. President Bill Clinton on Tuesday and would desperately like to report that a plan to clean up the bad loan-laden banking system is well on its way to implementation.

Finance Minister Kiichi Miyazawa told reporters he hoped that Obuchi could meet opposition party leaders later in the day to seek a compromise, but added that discussions inside the ruling Liberal Democratic Party (LDP) had not yet reached the stage where that was feasible.

``At present, we have not completed the basis for what we would ask the prime minister to decide,'' Miyazawa said after emerging from talks with Obuchi, Chief Cabinet Secretary Hiromu Nonaka and LDP policy chief Yukihiko Ikeda.

Miyazawa said the two key sticking points were treatment of the Long-Term Credit Bank of Japan and opposition demands to strip financial system policy-making powers from the Finance Ministry.

Media reports said earlier that the LDP and the opposition were expected to reach an accord at a leaders' meeting late on Thursday.

Financial daily Nihon Keizai Shimbun said the two sides had reached a basic agreement to temporarily nationalise LTCB by having the government buy the bank's common shares under a scheme originally proposed by the opposition.

At the same time, the opposition would countenance an infusion of taxpayers' money into LTCB, the newspaper said.

Earlier on Thursday the LDP presented its latest offer to its opposition rivals.

The ruling party, which lacks a majority in parliament's Upper House, has in recent days made a series of compromise offers to bring its banking scheme closer to more stringent opposition proposals that would immediately nationalise failed banks, cause shareholders of troubled banks to take a harder hit and shorten the time needed for financial system consolidation.

In its latest draft, the LDP also said the government would -- on its own responsibility-- prepare a scheme to stabilise the financial system, including a remedy for undercapitalised banks. The draft did not elaborate on what that scheme might be.

Financial analysts said whatever framework was finally agreed on, authorities would have a tough time restoring confidence in their ability to implement the scheme.

``For me, the biggest question is one of credibility,'' said Alicia Ogawa, head of research at Salomon Smith Barney. ``Is there anyone left in Japan who has any credibility?''

While the politicians bickered, Tokyo share prices slumped, partly due to renewed concerns over the banking system and fears that the final deal would hurt bank shareholders.

The 225-Nikkei share average closed at its lowest level in over 12 years. It ended the day down 2.38 percent or 338.56 points at 13,859.14.

U.S. Trade Representative Charlene Barshefsky, meanwhile, gave voice to Washington's concerns about Japan's fragile financial sector.

``It is critically important that the opposition and the majority party work through this problem so as to make provisions for substantial public funding for Japanese banks...and in particular with respect to weak but solvent banks,'' she told reporters, echoing almost verbatim comments by U.S. Treasury Secretary Robert Rubin on Wednesday.