(Adds details in paras 7, 12, 13)
By Linda Sieg and Elaine Lies
TOKYO, Dec 5 (Reuters) - A Japanese state secrets bill toughening penalties for leaks came a step closer to becoming law on Thursday when ruling parties forced it through a parliamentary panel amid protests it will muzzle the media and help cover up official misdeeds.
Prime Minister Shinzo Abe says the law is vital to the smooth operation of a new National Securities Council that will strengthen the hand of the prime minister over foreign and security policy and persuade foreign countries such as close ally the United States to share key information.
Media, publishers, lawyers and even entertainers have denounced the bill, which drastically expands the definition of state secrets and for some has echoes of Japan's harsh authoritarian regime before and during World War Two.
Abe's drive to pass the law coincides with a worldwide debate on secrecy after former U.S. National Security Agency contractor Edward Snowden leaked documents and a U.S. Army private leaked information to anti-secrecy group Wikileaks.
"This is the way the reign of terror begins!" shouted opposition lawmaker Hirokazu Shiba when a member of Abe's ruling bloc broke off questioning and motioned for a vote by a panel in parliament's Upper House.
Opponents of the measure circled the committee chairman, with one leaning over his desk, waving a sheaf of papers directly in his face as he called for the vote.
Abe wants to pass the bill before parliament's session ends on Friday, and Japanese media said it was unlikely to come to a vote before then. It has already passed the lower chamber.
Under the bill, public servants or others with access to state secrets could be jailed for up to 10 years for leaking them. Journalists and others in the private sector convicted of encouraging such leaks could get up to five years if they use "grossly inappropriate" means to solicit the information.
"I think we have had exhaustive debate," Chief Cabinet Secretary Yoshihide Suga told a news conference. "If we explain this carefully, the public's concerns should be resolved."
But critics said the bill's proponents had failed to address doubts that oversight mechanisms would ensure independent review.
Top officials in all ministries will be able to designate special state secrets in four categories - defence, diplomacy, counter-terrorism and counter espionage - that can be kept secret for up to 60 years and in some cases longer.
More than 7,000 people gathered outside parliament on Thursday in the largest protest yet, many harking back to Japan's harsh state secrecy regime before and during World War Two.
"I think Japan will become a country where people all spy on each other and we can't say what we really want to say," said university student Ai Kano.
Critics' anger was fanned last week when the No.2 executive in Abe's ruling Liberal Democratic Party, Shigeru Ishiba, wrote on his blog that the demonstrations were "not so different from an act of terrorism". He later modified the comment to say the protests were not democratic.
The move to push the bill through could dent Abe's popularity, which has already slipped to just below 50 percent in one poll this week from early highs of around 60 percent.
Even so, some political experts said the damage was unlikely to be long-lasting. More critical for voters is whether his "Abenomics" prescription of hyper-easy monetary policy and fiscal spending keeps the economy afloat.
"As long as 'Abenomics' is producing some results and the Nikkei share average stays above 14,000, support for Abe will not fall," said Hokkaido University professor Jiro Yamaguchi. (Additional reporting by Kiyoshi Takenaka; Editing by William Mallard and Nick Macfie)