The Nikkei average dropped 1.8 percent on Monday, as fears of slowing global growth and the spreading impact of Europe's credit woes encouraged investors to pull funds out of risk assets.
Japanese shares slumped along with equity markets across Asia, as well as crude and base metals prices and U.S. stock futures, suggesting the rout has room to continue. Shares of Sony Corp fell to their lowest intraday level in nearly a quarter century.
Bank shares slipped after weekend news that Greece will miss a deficit target set just months ago in a massive bailout package. Government draft budget figures released on Sunday showed that drastic steps taken to avert bankruptcy may not be enough.
The October-December quarter begins today, so there is hope for domestic fund buying, but right now the market's focus is Greece's problems and how Europeans will address the situation, as well as U.S. data this week that will show us more about the economy, said Fujio Ando, senior managing director at Chibagin Asset Management.
The Bank of Japan's tankan survey released before the market open showed business sentiment turned positive in the third quarter as companies restored supply chains hit by the March earthquake, even as a strong yen and the euro zone debt crisis clouded the outlook.
The results show that the domestic economy is holding up even with the strong yen, and the biggest concerns are external, not internal, such as the impact of Europe's debt problems on global growth, said Yutaka Shiraki, senior strategist at Mitsubishi UFJ Morgan Stanley Securities.
The Nikkei ended down 1.8 percent at 8,545.48, after falling as far as 8,455.67. The benchmark gained 1.6 percent last week but lost 2.8 percent for the month and 11.4 percent for the quarter, turning in its worst quarterly performance since June 2010. But it remained above its two-and-a-half-year closing low of 8,374.13, set on Sept. 26.
The broader Topix index declined 1.9 percent on Monday to 747.11.
Sony shed 4.5 percent to 1,439 yen, after earlier falling to 1,413, its lowest since June 1987, as foreign investors sold the stock.
Large-cap companies like Sony fall whenever foreign funds are selling, amid low expectations for good news about Greece, said Takashi Ushio, general manager at Marusan Securities.
U.S. investment bank Morgan Stanley plummeted on Friday on concerns about its exposure to European banks, leading financial shares lower, and that weighed on their counterparts in Japan.
Mitsubishi UFJ Financial Group fell 2.8 percent to 344 yen and Sumitomo Mitsui Financial Group slipped 2.7 percent to 2,146 yen.
Major Japanese producers of electric cables and wires extended their slide into Monday, led by Sumitomo Electric , which was down 11.8 percent at 809 yen in heavy trading, after Furukawa Electric agreed on Friday to a $200 million fine to settle investigations into price-fixing in the United States.
Analysts said Sumitomo and Fujikura , which are also under investigation by U.S. authorities, risk similar fines. Furukawa declined 7 percent to 198 yen while Fujikura was 5.1 percent lower at 244 yen.
Shares of Mitsui OSK Lines were down 7 percent at 279, after slumping to their lowest since March 2003 when the shipping company slashed its first-half earnings outlook to a net loss of 17 billion yen ($221 million) from a profit of 1 billion yen. Rival Kawasaki Kisen fell 4.9 percent and Nippon Yusen dropped 4.3 percent.
Softbank Corp rose 3.3 percent to 2,368 yen and was the heaviest-traded issue by turnover, after Jack Ma, CEO of China's e-commerce leader Alibaba, said he was keen on buying Yahoo Inc . Softbank owns about 30 percent of Alibaba Group, and holds 42 percent in Yahoo Japan , which is owned 35 percent by Yahoo.
Promise Co rose by its daily limit for a second session in a row, climbing 100 yen to 759 yen, after the consumer lender said on Friday that SMFG would launch a tender offer to buy the outstanding shares of Promise it does not already own for 780 yen each.
Aiful , a consumer lender affiliated with Mitsubishi UFJ Financial, rose 3.5 percent to 117 yen, while Acom , a lender which had sought rescheduling of debt repayments, rose 10.1 percent to 1,651 yen.
Volume was moderate, with 1.9 billion shares traded on the Tokyo Stock Exchange's main board, a bit under last Friday's 2 billion shares. More than five times as many shares declined as rose.