Feb. 17 (Bloomberg) -- Japanese Finance Minister Shoichi Nakagawa resigned amid accusations he was drunk at a Group of Seven press conference, dealing a fresh blow to Prime Minister Taro Aso’s teetering government.

“I deeply apologize to the prime minister, the people and members of parliament for the significant trouble I caused,” Nakagawa, 55, told reporters in Tokyo today. Aso appointed Economic and Fiscal Policy Minister Kaoru Yosano to replace him.

Aso’s popularity has plunged as lawmakers from both sides of parliament criticized his handling of the economic crisis and a series of scandals and misstatements drew public ire. Nakagawa’s departure comes as companies from Toyota Motor Corp. to Sony Corp. fire thousands of workers and the nation heads for its deepest recession since World War II.

“I would not be surprised if this folly signals the death- knell” for Aso’s ruling Liberal Democratic Party, said Kirby Daley, senior strategist and head of capital introductions at Newedge Group in Hong Kong. Nakagawa’s “unthinkable behavior, and the fact that the prime minister did not immediately call for his job, reduces his own fledgling credibility.”

The Nikkei 225 Stock Average fell 1.4 percent in Tokyo, extending this year’s losses to 14 percent. The yen traded at 92.08 per dollar at 5:13 p.m. from 92.54 before the announcement.

Nakagawa’s resignation coincided with a Tokyo press conference by U.S. Secretary of State Hillary Clinton, at which she invited Aso, 68, to be the first foreign leader to meet President Barack Obama in Washington. Clinton will also meet Ichiro Ozawa, head of the opposition Democratic Party of Japan.

Parliamentary Gridlock

Parliamentary gridlock has prevented Aso from spending 10 trillion yen ($108 billion) to cushion the economy from its slide. Gross domestic product shrank an annualized 12.7 percent last quarter, the most severe contraction since the 1974 oil crisis and worse than declines in the U.S. and Europe.

“This mess over the weekend definitely negatively affected market sentiment and people’s confidence,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG in Tokyo. “The bigger problem is really a lack of leadership and ideas.”

Aso’s approval rating slid to 9.7 percent this week in a Nippon Television news survey, ahead of elections that must be called by September. The furor over Nakagawa is widening cracks in the coalition government.

Yosano, 70, will retain his post as economy minister, Kyodo reported. Japan faces the worst economic crisis in postwar history, he said after this week’s GDP report.

Veteran Lawmaker

The veteran lawmaker was runner up to Aso in the contest to head the LDP after Yasuo Fukuda resigned as prime minister in September. He said last month that Japan’s inability to pass the stimulus measures may leave it with nothing to show at the Group of 20 leadership summit in London in April.

Since returning from Rome, Nakagawa, Japan’s fourth finance minister in two years, has said a combination of medications and jet lag caused him to slur his words and nod off at the Feb. 14 press briefing. Nakagawa, who will remain an LDP lawmaker, said he didn’t want to be the cause of delay in the passage of budget bills in parliament.

Nakagawa, who also steps down as financial services minister, said a medical examination today diagnosed that he was exhausted as well as suffering from back pain and a cold. He will admit himself to hospital as soon as today, he added.

“The really extraordinary thing is that the whole situation actually got to this stage,” said Naomi Fink, Japan strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo. “The LDP could fall apart altogether.”

To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net

Last Updated: February 17, 2009 05:37 EST