TOKYO, Oct 30 (Reuters) - The Bank of Japan began withdrawing from credit markets on Friday but extended a key loan scheme, earning grudging backing from a government worried it may be too optimistic in its outlook.

The government has pressed the BOJ to continue its corporate debt buying and other measures the central bank argued were no longer necessary because credit markets have largely recovered from the global financial crisis.

"The government should not tell the BOJ what to do but the BOJ instead needs to take the government's stance into consideration," Finance Minister Hirohisa Fujii said after the central bank's policy meeting.

"I think the BOJ is doing that today."

Fujii has called into question the BOJ's economic outlook and that issue may remain in focus, after the central bank forecast growth to bounce back over the next few years.

Governor Masaaki Shirakawa said after a BOJ policy review that the bank has always been in close contact with the government and hoped to continue doing so.

The BOJ extended its low-interest loans scheme by three months, but set an expiry date for March and said it would end less-used funding measures - buying of corporate bonds and commercial paper - in December, as expected.

Bond markets and analysts took the move mostly in their stride, although the BOJ's announcement that the loan programme will terminate in March briefly pushed down euroyen futures.

"We felt that by reaching an early conclusion on our extension of the deadline for low-interest loans, we could avoid confusion in the markets," Shirakawa told reporters.

The BOJ stressed that despite its withdraw from credit markets it would keep interest rates very low for as long as necessary.

The BOJ forecast deflation to persist for a third year in its half-yearly economic outlook report.

"By extending the low-interest loan special operation the BOJ apparently wants to avoid being perceived by the public and the government as becoming hawkish," said Masamichi Adachi, senior economist at JPMorgan Securities.

"But by saying the measure will end in March, instead of not specifying a deadline, it showed that the bank wants to end the measure at any cost."

EXIT DEBATES

Central banks around the world have begun debating how and when to phase out their emergency steps to contain the damage wrought by the worst global financial crisis in decades.

The U.S. Federal Reserve has ended its programme to buy $300 billion Treasuries and is slowing down buying of mortgage-backed securities and agency debt.

The European Central Bank's various emergency measures, such as extra refinancing operations, will expire soon, after the end of this year.

Board member Atsushi Mizuno, a former BOJ bull whose view has turned pessimistic and is due to leave the central bank in December, opposed ending buying of corporate bonds and low interest loans, forcing votes of 7-1 in both cases.

The board voted unanimously to keep interest rates steady at 0.1 percent, as widely expected.

The BOJ's CP buying auction on Oct. 23 drew no bids for the third time in a row, and issuance rates are now lower than the cost of government borrowing, which BOJ officials have pointed to as the market-distorting drawback of running the programme too long.

OUTLOOK ROW

Some cabinet ministers have put the pressure on the BOJ, with the finance minister criticising the BOJ's economic assessment as too rosy. That gap could widen after the BOJ made bullish economic forecasts.

While its economic projection of 1.2 percent growth in the year from next April is more or less in line with forecasts by private forecasters, its projection of 2.1 percent in the following year looked optimistic, some economists said.

"The BOJ seems to be thinking that Japan is likely to achieve an economic recovery quickly in 2011/12," said Kyohei Morita, chief economist at Barclays Capital Japan.

In a sign weak demand is playing an increasing part in pushing down prices, the so-called core-core consumer price index, which strips out food and energy costs, fell 1.0 percent in September from a year ago, larger than than the 0.9 percent seen in the year to August.

The BOJ has nudged rates near zero and in July it extended the emergency measures it put in place in several stages from December last year through February this year.

BOJ officials won't admit that government pressure could influence its monetary policy decisions. But they do want to work closely with the government, and they have got the message that it isn't happy about the BOJ's view of the economy.

"The government always puts on pressure. You can't tell a dog not to bark," said Naomi Hasegawa, senior fixed-income strategist at Mitsubishi UFJ Securities.