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* Japan PM Aso says economy worsening rapidly

* Govt to sell over Y10 trln new bonds to pay for stimulus

* $154 bln stimulus spending plan seen boosting GDP 2 pct pts

* Markets see major new issuance, steepen bond yield curve

By Yuzo Saeki

TOKYO, April 10 (Reuters) - Prime Minister Taro Aso said on Friday Japan's economy was in crisis, as he formally announced government plans to spend $154 billion to help lift the country out of its deepest recession since World War Two.

"Japan's economy is worsening rapidly with exports and production tumbling. Job conditions are also deteriorating sharply," Aso told a media conference.

"Japan's economy can be described as being in a crisis."

Finance minister Kaoru Yosano said the government would issue more than 10 trillion yen ($100 billion) in new bonds to pay for the package, which would raise total issuance this year by at least a third to a record 44 trillion yen.

The government said the 15.4 trillion yen ($154 billion) in new stimulus spending was equivalent to 3 percent of GDP and was expected to push up real economic growth by 2 percent in the financial year to next March. It is the fourth such package in the past year and brings stimulus spending to around 5 percent of GDP as Japan battles a deepening slump with the global financial turmoil shrivelling demand for its cars, technology and other manufactured exports.

A senior government cabinet minister said this week he expected 10-11 trillion yen in additional new bonds to be sold, which would raise issuance by a third to a record 44 trillion yen this year.

Worries about the government's need to issue much more debt and the accompanying rise in long-term rates have caused a sharp steepening for the government bond yield curve.

The spread between the two- and 20-year yields reached 170.5 basis points earlier this week, its widest level in three years, although it has come back to 165 basis points.

The benchmark 10-year yield touched a five-month high of 1.490 percent on Friday but closed lower ahead of the announcement, at 1.450 percent.

Japan's government debt is already the highest among industrialised nations at about 150 percent of gross domestic product, prompting some lawmakers to warn there is a limit to how much stimulus it can afford.

Japan's economy tumbled 3.2 percent in the last quarter of last year and plunging business confidence has raised fears the situation is getting worse.

The world's No.2 economy has been more severely hit by the global recession than other major economies due to its heavy dependence on exports.

But other major economies are not immune, with the United States announcing a $787 billion stimulus package and European Union countries planning fiscal stimulus of 3 to 4 percent of GDP.

The government's stimulus efforts may yet face a rocky ride in a divided parliament, where the opposition controls the upper house and can delay legislation.

Prime Minister Taro Aso said on Thursday that the timing of a general election that must be held by October would depend on how opposition parties cooperate in implementing the stimulus plan.

Previous plans to respond to Japan's dire economic situation have been delayed by the parliamentary deadlock.

Aso has said he might call a snap election if the opposition delays enactment of budget bills needed to fund the stimulus package.

A senior official in the main opposition Democratic Party said on Friday his party had no plan to drag things out unnecessarily.

"It seems that Prime Minister Aso wants to link this issue with the election. We don't think it is necessarily desirable to resist and needlessly take time under these economic conditions," Yukio Hatoyama said in a news conference.

But an economist warned that expectations of an election could prompt lawmakers to try to earmark spending for their constituencies in an attempt to win voters' favour.

"As the lower house must hold an election by this autumn, there is a greater chance that public works projects backed by political interests could be included in the stimulus plan," said Yasuhiro Onakado, chief economist at Daiwa SB Investments. ($1=100.21 Yen) (Additional reporting by Yoko Kubota ( KUB - news - people ); Editing by Michael Watson)

Iceland's prime minister said Saturday he has no intention of stepping down over his country's economic meltdown, even as thousands of angry citizens demanded his resignation during a noisy protest outside parliament.

Geir H. Haarde said he intended to lead Iceland through a crisis that has seen the spectacular collapse of the island's high-flying "Nordic tiger" economy - and which he predicted would worsen next year.

"I think it's inevitable that we will have a severe drop in GDP, in purchasing power, in employment," Haarde told The Associated Press during an interview at his office in central Reykjavik. He said 2009 "will be a very difficult year for us."

A crowd of 4,000 to 5,000 people gathered in the bitter cold outside the tiny stone building that houses Iceland's parliament, demanding elections for a new government. Many expressed a sense of shock and betrayal at their country's sudden fall from grace.

Just last year, this volcanic island on the edge of the Arctic Circle topped a United Nations "best place to live" poll. But last month Iceland's three major commercial banks collapsed under the weight of huge debts amassed during years of rapid economic growth. Since then the value of Iceland's currency, the krona, has plummeted, businesses have gone bankrupt and hundreds of people are losing their jobs each week in this nation of 320,000 people.

"Everything's gone to the dogs," said protester Hilmar Jonsson. To illustrate the point, he came to the demonstration accompanied by a Labrador, two Chihuahuas and a silky terrier, all decked out in sweaters of the red, white and blue Icelandic flag.

Anti-government protests that began eight weeks ago have grown larger and angrier, and draw a wide cross-section of Icelandic society. Saturday's crowd included everyone from anarchists in ski masks to young families and retirees.

(CNN) -- The second grenade attack in three days targeted protesters occupying the Thai prime minister's compound in Bangkok early Saturday, local officials said.

The 3 a.m. blast injured eight people, one of them seriously, according to Erawan Rescue Center in Bangkok. The blast comes less than two days after a grenade was fired into the compound, killing one person and wounding 23 others.

One of the key protest leaders, Chamlong Srimuang, said the grenade was launched from the headquarters of the Bangkok Metropolitan police about 500 feet (150 meters) away, The Associated Press reported.

"The grenade was fired from the (police) headquarters. This proves the attackers were government security forces or bad guys who are supported by the government," AP quoted Chamlong as saying at the protest site.

The blast on Thursday was the first fatal assault since supporters of the People's Alliance for Democracy (PAD) seized the Thai government house in August. Other anti-government protesters have been killed in street demonstrations organized by the PAD against the current government.

Protesters claim that the current administration, while democratically elected, acts as a proxy government for one-time Thai Prime Minister Thaksin Shinawatra, who was ousted in a bloodless coup in 2006.

He returned to Thailand after the People Power Party (PPP) swept to power the following year.

The protesters have held almost daily demonstrations since May. They seized the government house in August, fortifying it with sandbags, ties and shells of burned-out vehicles.

The PAD had demanded the ouster of Prime Minister Samak Sundaravej -- which the country's constitutional court granted in September, saying he'd violated the constitution by appearing as a paid guest on a television cooking show.

But the PPP responded by replacing him with Thaksin's brother-in-law, further inflaming protesters.