The prime minister faced angry protests during a visit to Okinawa from residents who had hoped to see the US Marine Corps' Futenma Air Station moved off the southern island.
Hatoyama met with the Okinawa governor and apologised for breaking his election promise to relocate the base.
"I apologise to people in Okinawa as I could not keep to my word that I'll relocate the base off the prefecture," Hatoyama said in a meeting with Okinawa governor Hirokazu Nakaima shown on television.
The island hosts the majority of the US troops and military bases in Japan.
"After holding a number of talks within Japan and with the United States, I reached the conclusion that I have to ask Okinawans about relocating the Futenma base within Okinawa -- specifically speaking, in the Henoko district," in a quiet coastal area of the island, Hatoyama told Nakaima.
A grim-faced governor replied: "I cannot help but say that the plan of relocating to Henoko is very regrettable and very difficult."
Hundreds of people protested outside the prefecture building, holding banners saying "We are angry" and some chanting "Hatoyama go home!"
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