Tokyo's Nikkei average ended down 0.91 percent on Monday as investors unloaded exporters after renewed security concerns and higher oil prices cast a shadow over the outlook for the US economy and stock market.
The Nikkei fell 103.54 points to 11,222.24, paring Friday's 1.88 percent gain.
The broader TOPIX index was off 0.32 percent at 1,135.64, with rises in shipping firms, utilities and steel makers preventing it from falling further.
Selling also hit insurers and some airlines after the United States raised its security alert level to high for a possible al Qaeda attack on a top financial institution.
Crude oil prices are also a concern for the United States, the world's biggest energy consumer, and resource-poor Japan, and the attack warning helped send US light crude oil futures to a new 21-year peak of $43.92 a barrel during Asian trading.
Gold gained, meanwhile, as investors sought a safe haven.
One fund manager said foreigners' cautious investment stance towards Japanese shares was unlikely to change in the near future given increasing uncertainty about oil prices and US interest rates, a major factor underscoring the outlook for the Tokyo market.
"It's a correction phase after a 50 percent jump (in the Nikkei) in the year to April. So despite a slew of good earnings for the April-June quarter, investors are more concerned about a possible deterioration in earnings in the quarters ahead," said Nishichi Omori, general manager at UFJ Asset Management.
"In addition, the lack of inflow of money from foreigners means it's difficult for the Tokyo market to regain lost momentum any time soon," he said.
The Nikkei was up 5 percent from the beginning of this year. But it was 7.7 percent below its three-year closing high above 12,100 points marked in late April.
Just over 1 billion shares changed hands on the first section, down slightly from Friday's total of 1.06 billion and the daily average for July of 1.025 billion.
Decliners outnumbered gainers 823 to 603.
Toyota Motor Corp, the world's second-biggest auto maker, dropped 1.12 percent, falling with its rivals.
Toyota is seen set to release a strong quarterly report on Tuesday, with analysts expecting double-digit profit growth on runaway sales. Other firms reporting include Tokyo Electric Power Co Inc and copier maker Ricoh Co Ltd.
Japan Airlines Corp, Asia's biggest airline, fell 2.48 percent to 315 yen and non-life insurer Millea Holdings Inc shed 1.83 percent to 1.61 million yen.
In contrast, high oil prices lured investors to resource development firm Japan Petroleum Exploration Co Ltd, which jumped 3.74 percent to 4,440 yen.
Shipping firms were among a number of stocks investors picked as they fled from volatility in high-tech and other exporters.
"Investors are shifting their money out of those which in general have high correlation rates to the US stock markets.
They prefer shipping and steel firms," said Yusuke Sakai, manager of equities at Mizuho Securities.
Ship operator, Kawasaki Kisen Kaisha Ltd, jumped 6.63 percent to 595 yen, helping boost the sea transport sector sub-index ISHIP, which ended 3.85 percent higher.
Kawasaki Kisen on Friday revised up its group net profit estimate for the six months to September by 43.5 percent to 33 billion yen ($297 million) thanks to strong freight demand.
Among technology stocks, Sanyo Electric Co Ltd lost 3.06 percent to 412 yen after the company, the world's largest maker of digital cameras with its output mostly supplied to other firms on an original equipment manufacturer (OEM) basis, posted a 17 percent fall in quarterly operating profit on Friday.
Adding gloom to the sector, the world's third-biggest digital camera brand, Olympus Corp, said after the market close that its quarterly profit fell 88.4 percent.
Shares of Olympus edged down 0.23 percent to 2,150 yen.
Even firms with bright earnings prospects were sold, such as Tokyo Electron Ltd, which said on Friday it had swung back into the black in the latest quarter. It also raised its full-year outlook by 29 percent.
Shares of Tokyo Electron, the world's second-largest maker of chip equipment, lost 0.37 percent to 5,430 yen.