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TOKYO - Japanese voters handed a stinging electoral defeat to the ruling party Sunday, exit polls showed, rejecting a proposal to increase taxes and handicapping a fledgling government struggling to keep the world's second-largest economy from financial meltdown.

With public spending at more than double its GDP, Japan is trying to manage its ballooning debt while also addressing high unemployment and stagnant growth. Prime Minister Naoto Kan has warned the country could face a Greek-style meltdown if it does not get its finances in order - possibly by raising the sales tax.

On Sunday, the progressive Democratic Party of Japan was on its way to losing its slim majority - a stark contrast to the landslide victory it scored in August that ended the pro-Washington, conservative party's nearly 50-year grip on power.

Official results were not expected until today, but exit polls conducted by Japan's public broadcaster and all major TV networks projected the Democrats would end up with 106 to 110 seats in the 242-member chamber.

The election won't directly affect the Democrats' grip on power because they control the more powerful lower house of parliament. But it does raise the serious prospect of gridlock.

"It's bad news for Kan and the party, and its really bad news for the nation because it means there isn't going to be resolute action on all the festering problems facing the government," said Jeff Kingston, director of Asian studies at Temple University in Japan. "And that's got global repercussions."

Many economists have slammed Kan's analogy with Greece as alarmist - primarily because most of Japan's government bonds are held domestically, meaning investors are less likely to bolt - and analysts said voters recoiled from the idea of paying more taxes.

"I don't think Japan is in a position like Greece, but things aren't good, either," Kingston said. "I don't think markets are going to react well to this. We are going to go through another period of a rudderless Japan. Japan's leadership crisis is not over."

Japan has had six prime ministers in four years. Kan only took power a month ago after former Prime Minister Yukio Hatoyama quit in the wake of a funding scandal and his failure to keep a campaign promise to move a U.S. Marine base off the southern island of Okinawa.

Now he will have to seek a coalition partner to avoid parliamentary gridlock. But the Democrats will face an emboldened opposition led by the Liberal Democratic Party, which governed the country for most of the post World War II period.