Japanese stocks plunged 10.6 percent on Tuesday, posting the worst two-day losing streak since 1987, on reports of rising radiation near Tokyo, suggesting any deterioration at a quake-hit nuclear plant could trigger more panic selling led by hedge funds.

The yen tripped on talk of intervention and bond yields rose as investors sold debt to offset losses in the stock market. The scale and speed of the equity selloff, on record volume for a second day running, forced fund managers to sit on the sidelines.

Even if we wanted to sell today there was very little we could do, said a fund manager at a Japanese fund, asking not to be named because he was not authorized to speak to the media.

We didn't sell and waited sidelined because hedge funds were just dumping stocks in panic.

At one point the broader Nikkei plunged 14 percent after Prime Minister Naoto Kan said the risk of nuclear contamination was rising at the Fukushima Daiichi complex on Japan's ravaged northeastern coast, 240 km (150 miles) north of Tokyo.

Equity futures fell and the yen rallied as risky assets were dumped. The yen steadied soon after, raising suspicion that authorities had intervened. The Ministry of Finance declined to comment on intervention.

In contrast to Monday's trading, when construction stocks rose, none of the 225 constituents of the benchmark Nikkei average gained on Tuesday. The broad TOPIX index of Japanese stocks has dropped by 16.3 percent this week, the worst two-day losing streak since the global equity crash of October 1987.

All focus is on the nuclear crisis. In the situation where the crisis appears to be worsening, foreign investors, domestic fund operators are pulling out from Japanese shares, Hideyuki Ishiguro, a supervisor at Okasan Securities in Tokyo.

The TOPIX share index plummeted 12.1 percent to 743.10, after posting the biggest full-day decline since the 2008 financial crisis on Monday on record volume.

The Tokyo Stock Exchange's biggest companies have lost about $626 billion in value this week. Volumes on the TSE first section were 5.77 billion shares, a nearly 20 percent increase from the record peak reached the previous day, itself the biggest since World War Two.

The Nikkei share average dropped 10.6 percent to 8,605.15, the biggest percentage loss since the global financial crisis of 2008.

During the trading day Japanese officials tried to calm the market to little avail and took measures to reduce short selling, such as placing limits on broker sales of stocks for arbitrage trading.

Shares of Tokyo Electric Power, the owner of the stricken nuclear plant, did not trade, although sellers massed at the indicated price of 1,221 yen on Tuesday. There were no buyers at that price.

The utility's credit default swap spreads, contracts that protect against debt default and restructuring, were at 190 basis points, exploding from 40 basis points on Friday and indicating nervousness about the company's future.

Since the quake, the Japanese government's CDS spreads have widened by around 35 basis points to 115 basis points, near the record 120 basis points reached in February 2009.

Ten-year Japanese government bond futures gave up most gains as selling emerged in the cash market, finishing with a gain of 0.36 point at 140.28 after been up more than a full point at one stage.

Insurance companies were cited behind the selling in cash JGBs. Benchmark 10-year yields rose by one basis point to 1.215 percent.

The worries about the potential fiscal cost of the crisis and new bond issuance caused a further back-up in long-term yields and steepening of the yield curve. The spread between 5-year to 20-year yields spread widened further to 158 basis points.

Amid a lot of uncertainty, there are possibilities of additional bonds issuance with the supplement budget. Investors including life insurers may back off at the auction, said Chotaro Morita, head of fixed income strategy research at Barclays Capital Securities in Tokyo.

The yen was up slightly at 81.85 per dollar, relatively stable in the face of the equity market selloff.

Traders were on alert for signs that Japanese investors were repatriating funds, a phenomenon pushed up the yen in the wake of the 1995 Kobe earthquake.

At one point, the dollar spiked against the yen in volatile trading and dealers suspected the authorities may have intervened in the market. They later downplayed the idea, with a large buying order seen exaggerating the move in choppy trade.

The dollar had touched a low around 80.60 on Monday, less than a yen from the record low of 79.75 yen touched in 1995 on trading platform EBS.

(Additional reporting by Tokyo News bureau and Masayuki Kitano in Singapore, Writing by Kevin Plumberg)