DPJis voting for the country's sixth new prime minister in just five years.
Trade Minister Banri Kaieda is running off against Finance Minister Yoshihiko Noda, after a first-round vote in which no candidate secured a clear majority.
Public favourite and former Foreign Minister Seiji Maehara is out of the race.
Prime Ministerannounced his resignation on Friday, after criticism of his handling of the quake aftermath.
Mr Maehara was the front-runner until it emerged that Mr Kaieda had won the support of former party leader and heavyweight Ichiro Ozawa, who leads the DPJ's largest faction.
Correspondents say the winner will face a daunting agenda.
Large parts of Japan need to be rebuilt after March's earthquake and tsunami, and the crisis at the crippled Fukushima nuclear power plant still needs to be resolved.
Added to that, the new prime minister will need to address Japan's stagnant economy.
Mr Kan stepped down after just 14 months in charge.
He was criticised for failing to show strong leadership after the earthquake and during the ensuing nuclear crisis.
After the 398 MPs of the ruling Democratic Party of Japan (DPJ) conclude their vote, the winner will become prime minister once approval is given by the Diet, or parliament.
In the first round, Mr Kaieda gained 143 votes and Mr Noda 102. Many supporters of third-placed former Foreign Minister Seiji Maehara, who won 74 votes, were expected to back Mr Noda.
The five candidates spent the weekend jockeying for position among DPJ MPs.
The contest has turned into a bitter factional battle between supporters and enemies of powerful but scandal-tainted kingmaker Ichiro Ozawa.
Mr Ozawa is believed to command the loyalty of about 130 members of parliament, despite awaiting trial on charges of misreporting political donations.
Known as the Shadow Shogun for his backroom power, he has been suspended from the party, a decision Mr Kaieda has hinted he may review,
The favourite with the public was Mr Maehara, May be he will become Japan's youngest leader since World War II if elected.
Farm Minister Michihiko Kano and former Transport Minister Sumio Mabuchi were also in the contest.