Japanese officials have admitted for the first time that thousands of people evacuated from areas near the Fukushima Daiichi nuclear power plant may never be able to return home.

A report by members of the governing Liberal Democratic party [LDP] and its junior coalition partner urges the government to abandon its promise to all 160,000 evacuees that their irradiated homes will be fit to live in again.

The plan instead calls for financial support for displaced residents to move to new homes elsewhere, and for more state funding for the storage of huge quantities of radioactive waste being removed from the 12-mile evacuation zone around the plant.

The parties' admission that some areas closest to the wrecked facility will remain too contaminated for people to make a permanent return is a blow to official assurances that radiation can be brought down to safe levels.

The government has come under pressure to abandon those promises amid evidence that attempts to reduce radiation to its target of 1 millisievert a year are failing.

Decontamination is woefully behind schedule in seven of the 11 selected towns and villages, forcing authorities to concede recently that they will not finish the work by the March 2014 deadline.

The plant's operator, Tokyo Electric Power [Tepco], is supposed to pay back government loans to fund the cleanup, but has balked at the huge expense while it focuses on a costly decommissioning operation at Fukushima Daiichi that is expected to last at least 30 years.

The government is prepared to borrow another 3tn yen to compensate evacuees and speed up decontamination of homes, schools and other public buildings in areas where reducing radiation levels is more realistic, reports say.

The new funding will bring Japan's expenditure on the nuclear crisis so far to $80bn (£50bn). That figure does not cover the cost of decommissioning the damaged reactors.

"At some point in time, someone will have to say that this region is uninhabitable, but we will make up for it," the LDP's secretary general, Shigeru Ishiba, said recently.

It now appears that officials will abandon efforts to clean up highly irradiated areas closest to the plant and focus on areas where there is a more realistic chance of success.

The evacuated region is divided into areas where people may return but not stay overnight, those that are preparing for similar status, and those that will remain no-go zones for at least five years because radiation doses exceed 50 millisieverts a year.

The last category includes the small town of Okuma, where evacuated residents told the Guardian more than two years ago that they had given up all hope of ever returning.

On Tuesday, evacuees reacted with anger at the government's about-turn.

"Politicians should have specified a long time ago the areas where evacuees will not be able to return, and presented plans to help them rebuild their lives elsewhere," Toshitaka Kakinuma, a 71-year-old Okuma resident living in nearby Iwaki, told the Asahi Shimbun newspaper.

Mental illness, alcohol abuse and physical ailments such as deep-vein thrombosis owing to inactivity are reportedly on the rise among tens of thousands of Fukushima evacuees still living in temporary housing units.

As of August, the number of people in Fukushima who died from illnesses connected to the evacuation stood at 1,539, just short of the 1,599 deaths in the prefecture caused by the 11 March tsunami.

Few evacuees say they would go back, even if they could. In Okuma, just 10% of residents want to return to their old homes; the figure is 12% in Tomioka, one of the most heavily contaminated villages.

Some experts have criticised as unrealistic the government radiation target of 1 mSv a year. The UN's international commission on radiological protection [http://www.icrp.org] states that annual doses of up to 20 mSv pose no demonstrable threat to human health.

The government reportedly hopes to persuade residents to return to areas with atmospheric doses below 20 mSv a year, while keeping the 1 mSv level as a long-term goal.

Meanwhile, Japan's popular former prime minister, Junichiro Koizumi, has challenged plans by the current leader, Shinzo Abe, to restart nuclear reactors next year.

Koizumi, who stepped down in 2006 after five years in office, called on Abe to build on his popularity by honouring the wishes of the majority of Japanese, who want nuclear power phased out.

"[Abe] should use the power given to him to do what the majority of the people want," Koizumi said in a speech at the Japan Press Club. "It can be achieved. Why miss this chance?

"It is too optimistic and irresponsible to assume we can find a final radioactive waste storage site in Japan after the accident," he said, adding that even burying waste underground for 100,000 years could pose a threat to future generations.

"What language should we use to convey the hazards to those people in the future?" he said.

All 50 of Japan's working reactors are offline while safety checks are carried out.