Japan's Nikkei share average posted its biggest fall in a month and a half as it sank to a six-week low on Monday, hit by renewed fears that Spain may need a full-blown bailout and by the subsequent rise in the yen.
Exporters such as consumer electronics stocks fell as the news from Spain dragged the euro to a more than 11-year low against the yen, while the dollar dipped to a seven-week trough against the Japanese currency.
Trading was subdued as investors looked to Japan's earnings season, which begins in earnest later this week, though some market players said hopes were dimming that results would provide a catalyst for a market rebound.
"Because it is just the first quarter (of the Japanese financial year), company executives will probably strike a cautious tone and will not raise annual outlooks," said Tetsuro Ii, the president of Commons Asset Management.
The Nikkei shed 1.9 percent to 8,508.32, the lowest close since June 8. The broader Topix index fell 1.8 percent to 720.62, having fallen in 11 of the past 12 sessions.
In one clearly bearish signal, the Nikkei fell below important support from the bottom of cloud on the daily Ichimoku chart, which stood at 8,566.
The benchmark index has also now dropped below the 61.8 percent retracement of the rally between June 4 and July 4 that took it as high as 9,136 -- gains that came after a lull in the euro zone's debt woes helped investors focus on the prospects of Japanese stocks driven by domestic demand.
The weakness in Japanese shares followed declines in other major stock indices after the heavily-indebted Spanish region of Valencia asked Madrid for help.
Smaller Murcia is likely to be the next of half a dozen regional governments to follow in Valencia's footsteps, according to media.
"Just as the euro zone's problems had appeared to calm down, uncertainty rears its head again," said Masayuki Otani, chief market analyst at Securities Japan.
"It's not only in Spain where regional banks are in trouble, they're also weak in Italy and other countries," he said.
Not-so-great expectations
Fears of a worsening downturn in Europe are curbing expectations for exporters' results.
Printer makers and some other electronics firms suffered heavy losses after Xerox Corp
Ricoh Co Ltd dropped 7.0 percent, while Canon , the most-traded stock on the main board by turnover, lost 4.6 percent. Sony Corp and Panasonic Corp fell 4.1 and 4.4 percent respectively.
There are worries that domestically oriented stocks might soon run out of steam after gaining excessive attention since early June as investors cut exposure to exporters amid signs of slowing global growth.
"The mood is pretty bad. There are few stocks to buy. Last w eek w e had a bout 40-50 shares h it highs for the year even as the overall market declined, but today there are only eight such stocks," said Hideyuki Ishiguro, senior strategist at Okasan Securities.
"We can't rule out the possibility that the Topix will test 700," he added. As of Monday's close, the Topix stood 4.1 percent above a three-decade low of 692.18 hit in early June.
On the main board of the Tokyo Stock Exchange, 1.41 billion shared were traded, about 30 percent below the average so far this year and 1,503 shares declined -- the second-largest so far this year after May 7.
