Tokyo's Nikkei share average fell for a third day to close down 1.17 percent on Wednesday, with small investors leading the selling on worries about the economic impact of record high oil prices.
"The market is full of uncertainty, which has made investors extremely nervous," said Tetsuya Ishijima, senior investment strategist at Okasan Securities.
"Another potential rise in US interest rates coming, higher oil prices and a fall in final product prices at high-tech firms - this is all reducing visibility in the stock markets."
The Nikkei was down more than 2 percent at one stage, tumbling below the psychologically important 11,000 mark for the first time since June 3, but stop-loss selling by small investors ran out of steam towards the close and it ended down 130.55 points at 11,010.02, still the lowest close since May 25.
The broader TOPIX index fell 1.09 percent to 1,114.76.
Decliners outnumbered gainers 1,271 to 202. Trading was active with about 1.18 billion shares changing hands on the first section, the biggest daily total since July 14, and compared with 1.10 billion shares on Tuesday.
However, institutional investors were not particularly active because of the summer holiday season and some analysts blamed that for increased price volatility.
After the market closed, a Tokyo court upheld a decision to block troubled UFJ Holdings Inc from holding take-over talks involving its trust banking unit, hampering plans by Mitsubishi Tokyo Financial Group Inc (MTFG) to take over its smaller rival.
Talks between UFJ and MTFG hit an impasse last week when the court granted Sumitomo Trust & Banking an injunction blocking UFJ from including the unit in merger talks. Sumitomo Trust had an agreement to buy the UFJ trust business.
Among exporters, Japan's biggest office machine maker, Canon Inc, which generates about three-quarters of its sales overseas, fell for a third day, down 1.48 percent at 5,310 yen.
Shares in Toyota Motor Corp, the world's second-biggest auto maker, also wilted, even though it announced stronger-than-expected quarterly earnings on Tuesday. It ended down 1.6 percent at 4,300 yen.
Japan's biggest brokerage firm, Nomura Holdings Inc, slumped 1.8 percent to 1,527 yen as caution grew over the stock market outlook.
Another notable loser was Mitsubishi Motors Corp, down 3.8 percent at 76 yen. It earlier hit a record low of 72 yen.
After the market closed, Mitsubishi Motors posted a big quarterly loss, as expected, but stuck to its full-year loss projections even though a recall scandal cut its domestic sales in half in the past few months.
The Nikkei Jasdaq average, which covers all Jasdaq-listed shares, ended down 1.08 percent at 1,838.53. It earlier dropped 2.7 percent to a level last seen on May 19.
Yahoo Japan, Japan's number-one Internet portal, hit a six-month low of 804,000 yen before ending the day down 3.14 percent at 833,000 yen.
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