The Nikkei average fell 1.6 percent on Wednesday as property shares including Sumitomo Realty & Development fell on concern about a slowing real estate market while worries about subprime debt hurt banks.
Aggressive sales of futures also dragged down the cash market while some said investors could be unloading stocks ahead of book closings for the end of Japan's financial first half on September 30.
Bucking the bearish trend, Sony Corp rose 2.3 percent to 5,740 yen after it said it would list shares of its financial arm on the Tokyo Stock Exchange next month.
Some market players attributed selling in property stocks to corporate spending data on Monday, which showed a slowdown in momentum for the real estate industry.
Capital spending by property firms dropped 47.3 percent year-on-year during the April-June period, the data showed.
Credit Suisse said on Monday in a report that investors should not overweight property stocks.
The situation for the property market does not look good and share prices are reflecting that, said Zenshiro Mizuno, senior managing director in Marusan Securities Co Ltd's equity trading division. Some people say the worst is over, but there are still uncertainties about fallout from subprime problems, he added.
The Nikkei lost 262.02 points to end at 16,158.45. The broader TOPIX index declined 1.7 percent or 27.27 points to 1,569.47.
Katsuhiko Mori, senior portfolio manager at Daiwa SB Investments' equity management dept, said selling on Wednesday may be related to the September book closing.
The market is not at the level where investors can lock in profits, he said. They may be selling because they need to adjust holdings. After all, we are halfway through the fiscal year this month.
Mori also said there are only few aggressive buyers around to support the market.
Trade volume was moderate with 1.8 billion shares changing hands, up from 1.4 billion shares on Tuesday. Decliners beat advancers by a ratio of more than 9 to 1.
PROPERTY SHARES SINK
Sumitomo Realty & Development, Japan's third-largest property developer, tumbled 4.9 percent to 3,520 yen and industry leader Mitsui Fudosan Co Ltd declined 4.1 percent to 2,780 yen.
Property investment firm KK DaVinci Advisors declined 6 percent to 68,000 yen.
Bank shares rang up losses with Mizuho Financial Group Inc down 2.4 percent at 702,000 yen and Sumitomo Mitsui Financial Group losing 1.5 percent to 872,000 yen.
Selling was seen across the board and shippers and steel stocks, which had drawn buyers for their solid earnings prospects, also declined.
Nippon Steel Corp dropped 1.8 percent to 800 yen and Mitsui O.S.K. Lines shed 1.8 percent to 1,694 yen.
Hitachi Construction Machinery Co Ltd ended up 0.2 percent at 4,190 yen after the company's CEO told Reuters that the firm is targeting 70 percent growth in sales and a doubling in profit over four years as demand for earth-moving equipment is booming in China.