The benchmark Nikkei 225 index at the Tokyo Stock Exchange closed 154.81 points down to 8,545.48, after dipping 2.8 percent at one point in the afternoon trade.

The Topix index of all first-section issues sank 14.06 points or 1.85 percent to 747.11.

Exporters fell on concerns about the European economy following a jump in the eurozone's annual inflation rate for September.

Greece also said Sunday that its budget deficit should drop to 8.5 percent of GDP in 2011 from 10.5 percent last year, short of a 7.4-percent target initially fixed in June.

The announcement deepened fears of a default as the target had been set by European leaders as part of its bailout deal.

"It's quite difficult to find a catalyst for a rebound concerning the Greek problem and US economic conditions," said Yutaka Miura, a senior technical analyst at Mizuho Securities.

The euro fell to $1.3319 in Tokyo afternoon trade from $1.3451 in New York late Friday and to 102.67 yen from 103.12 yen.

Companies with large business in Europe tumbled. Sony plunged 4.51 percent to 1,439 yen with camera and other precision equipment maker Olympus falling 4.59 percent to 2,306 yen.

"The outlook for Japanese equities remains uncertain due to the cloudy global economic conditions, European debt problems and the sharp appreciation in the yen," said Hiroichi Nishi, general manager at SMBC Nikko Securities.

Stocks lost ground despite a report released by the Bank of Japan early Monday that showed the business confidence of major manufacturers turned positive in September after diving in the wake of Japan's March disasters.

"While firms' sentiment is improving, we need to keep a watch on how European debt problems, European and US economic conditions, and the stronger yen will impact the next survey," said Takashi Ushio, general manager at Marusan Securities.

Panasonic lost 4.11 percent at 723 yen, with Hitachi down 2.82 percent at 378.