The panel said it was difficult to determine the safety of the reactor, noting the proximity of a seismic faultline. Consequently, it said, the reactor was not deemed compliant with criteria for installation licensing.
"We will conduct an additional investigation. We are not considering decommissioning the plant," Mamoru Muramatsu, president of Japan Atomic Power, said after the panel meeting, according to Kyodo News Agency.
The government in Japan, one of the world's most seismically active countries, does not allow nuclear plants to be situated over active faultlines.
The panel is set to report its decision to the Nuclear Regulation Authority (NRA) soon.
If approved, this would be the first case of non-compliance under the stricter safety standards imposed after the 2011 Fukushima nuclear disaster.
The move could hinder the government's efforts to restart more nuclear power plants to ensure a stable energy supply.
Japan, which had 54 operational reactors before the 2011 disaster, has restarted only 12 of the 33 nuclear reactors it has been considering restarting.
Along with most reactors in Japan, operations at the Tsuruga's No.2 reactor have been halted since 2011 following triple meltdowns at Tokyo Electric Power's (9501.T), opens new tab Fukushima Daiichi nuclear power plant.
On March 11, 2011, Japan's northeast coast was struck by a magnitude 9 earthquake, the strongest quake in Japan on record, and a massive tsunami, triggering the worst nuclear crisis since Chornobyl a quarter of a century earlier.
