The benchmark index briefly slid through the psychologically important 9,000 level, weighed down by cyclical stocks such as iron and steel companies, after stronger-than-expected U.S. housing data reduced the likelihood of a fresh round of bond purchases by the Fed.

The Nikkei lost 0.7 percent to 9005.52, while the broader Topix also dropped 0.7 percent to 745.00.

"People are now thinking it's less likely that the Fed are going to launch QE3 soon, which is making the upside heavy and prompting fears of a sell-off after Bernanke's speech," said Yutaka Miura, senior technical analyst at Mizuho Securities.

"China-related stocks are also suffering as fears of a slowdown in China are also ramping up."

Komatsu Ltd (6301.T), a construction machinery maker that relies on China for a significant portion of its sales, lost 2 percent and is down 4.9 percent this week, after the Shanghai Composite Index .SSEC slumped to its lowest close in three and a half years on Wednesday.

Concerns of slowing demand hit the iron and steel subindex of the Topix .ISTEL.T, which dropped 2.4 percent while Nippon Steel (5401.T) slid 3.6 percent.

Furukawa-Sky Aluminium Corp (5741.T) bucked the trend to advance 3.4 percent, however, after it announced a merger with Sumitomo Light Metal Industries Ltd (5738.T), which lost 3.9 percent on the news.

Nissin Electric Co Ltd (6641.T) dropped 4 percent after the power capacitor maker cut its net profit forecast for the financial year ending in March 2013 to 4.4 billion yen ($56 million) from 5 billion yen on Tuesday to reflect a loss in the first quarter by one of its Chinese subsidiaries.

Retailers came under pressure after data showed Japanese retail sales dropped 0.8 percent in July on a year earlier. Convenience store operator Seven & i Holdings Co Ltd (3382.T) lost 1.7 percent and was the fourth most-traded stock on the main board.

Investors have pushed the Nikkei up about 8 percent since it hit a seven-week low on July 25, largely on expectations that the European Central Bank will act soon to bring down Spain and Italy's high borrowing costs.

That boost has left the Nikkei 6.4 percent up on the year. ($1 = 78.7400 Japanese yen)