The Nikkei share average dropped more than 1 percent on Tuesday, with investors fearful about Europe's debt situation ahead of an Italian parliamentary vote on budget reforms, and as scandal-hit Olympus (7733.T) plunged after saying M&A funds were used to cover securities losses.

Italian woes pressured some stocks exposed to the debt-laden country, with Nomura Holdings Inc (8604.T) dropping almost 15 percent to its lowest since at least 1974.

In Rome, Prime Minister Silvio Berlusconi defied huge pressure to resign as he struggled to hold a crumbling center-right coalition together after being forced to accept intrusive IMF surveillance of his economic reforms.

Toyota Motor Corp (7203.T) fell 1.7 percent. After the market close, it posted a 32.4 percent drop in quarterly operating profit and withdrew its full-year profit forecasts as Thai floods pose a fresh threat to production while supply shortages from the March earthquake kept output low.

Because Toyota withdrew its full-year guidance, there is a perception that not all of the bad news is out of the way, and investors who have held onto its shares until now are likely thinking of giving up, said Masayoshi Okamoto, head of dealing at Jujiya Securities.

The Nikkei .N225 ended down for the second straight day, falling 1.3 percent to 8,655.51. The broader Topix index .TOPX lost 1.7 percent to 738.03.

Volume was moderate, with 1.85 billion shares changing hands, up from Monday's 1.45 billion. Nearly eight shares fell for each one that rose.

POSITIONING FOR LOSSES

U.S. stock futures also declined, suggesting investors were positioning for losses ahead of the Italian vote, with S&P 500 e-mini futures down 6.5 points at 1,251.

Olympus slid 29 percent and by its daily limit to end at a 16-year low of 734 yen after it admitted for the first time on Tuesday that controversial acquisitions had been used to cover up losses on securities investments dating back to the 1980s, succumbing to weeks of pressure that has battered the company's share price.

Olympus President Shuichi Takayama blamed Tsuyoshi Kikukawa, who quit as president and chairman on October 26, Vice-President Hisashi Mori and auditor Hideo Yamada for the transactions, adding he would consider criminal complaints against them if necessary. Mori would be dismissed, the company said.

Nomura fell 14.9 percent to 245 yen and was the heaviest traded issue by turnover on the main board, with nearly 8 times the issue's average 30-day volume changing hands. Earlier this month, it estimated its exposure to Europe at $3.55 billion, mostly in Italian government securities and positions that mature in the next five months.

Toyota said on Tuesday its operating profit for July-September was 75.39 billion yen ($966 million), worse than an average estimate of 101.3 billion yen in a Reuters survey of 12 analysts. Second-quarter net profit was 80.42 billion yen, down 18.5 percent.

For the year to March 31, 2012, Toyota had forecast an operating profit of 450 billion yen, but it withdrew its full-year forecasts for profit and vehicle sales due to uncertainty surrounding the Thai floods.