TOKYO (Reuters) - A potential ruling party rival to Japan's Prime Minister Shinzo Abe warned on Monday against excessive optimism over a breakthrough in a decades-old territorial row with Moscow when Abe meets Russian President Vladimir Putin in Japan next month.

A territorial feud over a chain of western Pacific islands, seized by Soviet troops at the end of World War Two, has precluded a formal peace treaty between the two countries.

Abe, who sees improved ties with Moscow as a counter-balance to a rising China, hopes the lure of economic cooperation will ease a breakthrough when he meets Putin in Japan on Dec. 15 and 16, given the hit to Russia's economy from sluggish oil prices and Western sanctions imposed after its annexation of Crimea.

"I hope negotiations between Japan and Russia will succeed, but we Japanese people must recognize this will not be so easy," said former Japanese Defence Minister Shigeru Ishiba, who has challenged Abe in the past for leadership of the ruling Liberal Democratic Party (LDP) and hinted he may do so again in future.

"It is clear when we look at statements by the (Russian) president and foreign minister that there is not one occasion where they said that if there is economic support, it will lead to some resolution of the territorial issue," Ishiba told a news conference, echoing the view of some pessimistic academics.

Japan has proposed economic cooperation in eight sectors, including medical technology and energy, and has been nudging wary Japanese firms to take part.

A list of projects seen by Reuters includes as targets for possible agreement by December an extension of Sakhalin-2, Russia's only operating liquefied natural gas (LNG) project, and a joint investment fund by the Japan Bank for International Cooperation and a Russian counterpart.

But a future pipeline linking Russia and Japan will not be the topic of high-level talks, according to the list.

U.S. President-elect Donald Trump's desire for better ties with Moscow appears on the surface to be a plus for Abe's approach after U.S. President Barack Obama's rocky ties with Moscow, but could also reduce Japan's geopolitical appeal for Putin, diplomatic experts said.

Abe told reporters after meeting Putin in Peru on Saturday that the path to a peace treaty was "coming into sight" but added it was "not easy to take a big step ahead".

Putin said separately that both sides were willing to sign a peace treaty but added, "The road leading to that is not a simple one."

(Reporting by Linda Sieg; Editing by Clarence Fernandez)