European shares <.FTEU3> were also expected to fall on the proposals, which would prevent banks or financial institutions that own banks from investing in, owning or sponsoring a hedge fund or private equity fund.
The restrictions could limit leverage in the financial system and the role of risk-taking by hedge funds, but analysts said passage of the proposals in the U.S. congress was not assured and it was too early to read too much into the market reaction.
There is little doubt that the president's actions are unwelcome by the financial markets, or that the president himself is clearly annoyed at the current largesse of this year's bonus round, said Sean Keane, an analyst at Triple T Consulting in Wellington and former head of money market trading at Credit Suisse in Singapore.
Whether or not this 'war' will see a real shot fired remains to be seen however, with the proposals needing Congressional approval before they can become law.
Japanese stocks <.N225> fell 2.56 percent to a three-week closing low as the yen surged against the dollar and the euro and as falling metal and oil prices weighed on shares of resource-related firms.
Other Asian markets were also badly hit. South Korea's benchmark <.KS11> fell 2.19 percent while Hong Kong <.HSI> slid as much as 2.5 percent during the day. Banks have a heavy weighting in many global benchmark share indexes.
The MSCI Asia-Pacific index excluding Japan <.MIAPJ0000PUS> was down 2.1 percent and looked set for a loss of 4.8 percent this week.
Commodity prices fell because the proposed U.S. regulations were seen as diminishing capital flows from banks, which have provided liquidity for investors.
Oil and copper languished near four-week lows, gold flirted with a three-week low and platinum lost ground, while agricultural commodities sagged.
U.S. stocks fell as much as 2 percent overnight, the worst one-day percentage fall since October, as financial shares in particular were hit by Obama's plan. <.N>
The rules would also bar institutions from proprietary trading operations, unrelated to serving customers, for their own profit. These bets have been enormously profitable for the banks but can hold huge risks for the financial system if they go wrong.
Obama is trying to restrict leverage... (but) it doesn't make a lot of sense. The basic premise in banking is to transfer risk and a riskless bank doesn't make sense -- or money, said Steve White, director at Sydney-based treasury advisory firm Noah's Rule.
Global markets had already recoiled in recent weeks on fears that Chinese demand would slow as Beijing taps the brakes on its roaring growth to stave off inflation and keep the economy from overheating.
Mixed data from the United States, meanwhile, have fueled concerns that the pace of its economic recovery may be slowing, and that corporate profits may not be as strong as first expected this year.
Other factors were at play in Tokyo as well.
Toyota Motor Corp <7203.T> lost 3.2 percent after it said on Thursday it would recall 2.3 million vehicles in the United States to fix potentially faulty accelerator pedals, broadening a recall that already ranked as its largest ever.
Shares of Shin-Etsu Chemical <4063.T> lost 6 percent after the world's biggest maker of silicon wafers used to make semiconductors reported a 53 percent fall in quarterly operating profit, hurt by weak prices and a strong yen, and it said it expected its annual profit to halve from a year earlier.
Earlier, the euro, which has been under pressure from Greece's debt troubles, hit a nine-month low against the yen at 126.55 yen, taking the dollar down with it.
The dollar lost ground and fell to its lowest in five weeks against the yen, dropping as far as 89.85 yen before steadying around 90.00. Support for the dollar is seen around 88.80/90 yen.
The dollar index <.DXY> was down about 0.13 percent around 78.217, just below its 200-day moving average at 78.48, which was seen as a zone of short-term resistance.
Equity and commodity sell-offs drove investors to safe-haven government bonds. Benchmark 10-year U.S. Treasuries rose 14/32 of a point overnight before pulling back.
Lead March 10-year Japanese government debt futures rose 0.25 point to 139.23 after hitting 139.46, their highest since the start of the month. The benchmark 10-year government bond yield fell 2 basis points to 1.320 percent.
(Editing by Tomasz Janowski)