Japan's prime minister, Yoshihiko Noda is poised to call a general election for next month, in a move that could see his party thrown out of office just three years after it was elected by a landslide.

Noda, who is expected to dissolve the lower house of parliament by the end of the week, agreed to an early election in return for opposition support for electoral reform and an urgent budget-financing bill.

After months of speculation, he is also making good on a promise to go to the polls early in exchange for opposition support this summer for a rise in the sales tax.

In a heated exchange on Wednesday, Noda told Shinzo Abe, leader of the main opposition Liberal Democratic party (LDP), he would call an election for 16 December. In return, the LDP would have to vote for plans to shrink the number of seats in the lower house and address the disparity in the weight of rural and urban votes.

"We have to achieve that as soon as possible," Noda said. "We must make a decision and set a deadline. Let's do it."

In reply, Abe said: "Is that a promise? You're sure, right? Absolutely sure?" adding, "We'll let the people decide which of us is more qualified to lead the country out of deflation and get the economy back on track."

Noda's Democratic party of Japan (DPJ) has a comfortable majority in the lower house but depends on other parties to push legislation through the upper house.

That arrangement has resulted in political deadlock, just as Japan's economy risks slipping back into recession and while the country attempts to repair relations with China in its dispute over the Senkaku islands .

Speculation over the election date has swirled around since the summer, adding to a lengthy period of political instability in which six prime ministers have been installed since Junichiro Koizumi's resignation in September 2006. Noda, who became leader last September, is the third DPJ prime minister since 2009.

"There's a real failure of leadership," Koichi Nakano, a professor of political science at Sophia University in Tokyo, told Associated Press. "That's in part because Japan's expectations for leadership are unrealistic. But also because the quality of leadership in Japan is really low."

Noda's decision was greeted with dismay by many DPJ lawmakers who had urged him to wait until the party's fortunes had improved. A poll by the Asahi Shimbun released this week showed support for the Noda cabinet at just 18%; Abe, meanwhile, is the most popular choice as leader.

Abe has said he would take a tougher stance against China over territorial disputes, and suggested he would revise a 1995 statement issued by the then socialist prime minister, Tomiichi Murayama, apologising for Japan's wartime conduct. He also wants to revise the constitution to give Japan's military a bigger role.

But Abe and his party's traditional ally, New Komeito, could fall short of an overall majority. That could open the door to a coalition involving smaller parties on the right led by the former governor of Tokyo, Shintaro Ishihara, and the mayor of Osaka, Toru Hashimoto.

Ishihara, who launched the party of the Sun on Tuesday, has been discussing a possible election alliance with Hashimoto's Japan Restoration party.

"The most prevalent view among the public is that this country will sink if things remain as they are," Ishihara told reporters.