Asian shares fell on Friday as disappointing U.S. manufacturing data raised concerns that its economic recovery may not be as fast as previously thought, while the dollar remained firm as investors booked profits on higher-yielding currencies.
Shares in Japan <.N225> slumped 2.5 percent as the weak U.S. data and concerns that a strengthening yen will hurt exporters unnerved investors, who shrugged off a surprise drop in Japanese unemployment.
As stocks tumbled, Japanese government bond futures hit their highest levels in six months.
Across the region, investors were rattled by an Institute for Supply Management report showing U.S. manufacturing growth was slower-than-expected in September, which helped push the Dow Jones average <.DJIA> down 2.1 percent, its worst one-day fall in three months.
The MSCI index of Asia Pacific stocks traded outside Japan fell 1.8 percent, while the Thomson Reuters index for regional shares <.TRXFLDAXPU> was down 1.4 percent. China, India and South Korean markets were closed for public holidays.
Markets are now keenly awaiting U.S. non-farm payrolls data due later on Friday for further clues on the strength of U.S. economic recovery.
A report on Thursday showed initial claims for state unemployment insurance rose last week, overshadowing other data showing U.S. consumer spending rose at its fastest level in nearly 8 years in August.
David Watt, senior currency strategist, at RBC Capital in Australia said the September U.S. manufacturing index played to the theme that, without aggressive stimulus from governments and policymakers, the formerly red-hot recovery is going stone cold.
Adding to investor concern was data showing U.S. car sales slumped 23 percent last month after the end of the government's cash for clunkers program, which had briefly boosted vehicle sales.
Japanese car makers were hurt by the drop in U.S. car sales with Toyota Motor <7203.T> sliding 2.9 percent and Nissan Motor <7201.T> was down 4 percent.
Australia's benchmark S&P/ASX 200 index <.AXJO> was down 2 percent as investors reassessed recent gains. Mining giants BHP Billiton
When the market has risen 50 percent without pause, there is far too much optimism out there, and misguidedly so. This is not even remotely justified on the economics, said Hugh Giddy, managing director at Cannae Capital Partners in Australia.
DOLLAR EDGES UP
The dollar benefited from the economic uncertainty, extending Thursday's gains as investors booked profits in higher-yielding currencies including the Australian dollar and the New Zealand dollar.
The euro was stuck at a three-week low of $1.4513 after falling nearly 0.7 percent on Thursday when the European Union's Economic and Monetary Affairs Commissioner Joaquin Almunia said currency's recent gains would be discussed at this weekend's G7 meeting.
As Japanese stocks fell, December 10-year government bond futures rose to as high as 139.67, their highest level since late March as financial markets were worried about the U.S. economic outlook. They overlooked a surprise drop in Japan's unemployment rate and an unexpected rise in household spending in August.
U.S. crude oil futures fell about 1 percent toward $70 a barrel after Washington said talks between Iran and six major world powers over Tehran's nuclear program were productive and opened the door to better ties.
Gold stabilized at around $1,000 an ounce after falling on Thursday.
(Additional reporting by Anirban Nag in Sydney and Victoria Thieberger in Melbourne)
(Editing by Kim Coghill)