The Nikkei share average fell 0.65 percent to a fresh three-month closing low on Monday as crude oil prices again hit record highs, clouding the outlook for the global economy and energy-dependent Japanese companies.
Investors' appetite for Japanese shares had already been dented by data on Friday showing weaker-than-expected gross domestic product (GDP) in April-June.
Retailers and other shares focused on domestic business suffered from a second day of heavy sell-offs. They had recently shown resilience due to expectations that the GDP data would be strong, while export-oriented manufacturers took a beating.
The Nikkei lost 69.39 points to end at 10,687.81, adding to a 292-point decline in the previous two trading days.
It was the Nikkei's lowest close since May 17, when it finished at 10,505.05.
The broader TOPIX index fell 12.17 points or 1.11 percent to 1,084.64, also a fresh three-month closing low.
The Nikkei fell as low as 10,545.89 in the afternoon, down 1.96 percent from the previous close.
It regained some ground towards the close, however, as quick short-covering lifted Nikkei index futures contracts, helped by views that the market's recent fall went too far, too fast.
"It's a minor rebound following the recent speedy sell-offs, which were a bit too much," said Toshihiko Matsuno, a senior strategist at SMBC Friend Securities.
Matsuno said it would take a while before the Tokyo market gained momentum and the Nikkei cleared 11,000, once a support point but recently firm resistance.
"In addition to record high oil prices there are geopolitical risks, and concerns about a global economic slowdown are another factor weighing on the market," he said.
US crude hit a record $46.91 a barrel, showing few signs that a steady climb since June was slowing as dealers awaited the results of a referendum on the rule of President Hugo Chavez in Venezuela, the world's number-five oil exporter. Violence in Iraq also unnerved investors worried about tight supplies.
Trading remained slow amid Japan's "obon" summer holiday season. A total of 1.011 billion shares changed hands on the first section compared with last week's daily average of 988 million.
Decliners outnumbered gainers 1,141 to 306.
Analysts put the consensus for the Nikkei's short-term floor at 10,500, around a low marked in May. One fund manager said a wave of bargain-hunting could emerge if the Nikkei slipped below 10,500.
"That means there would be buyers certainly at around 10,500, which is a tolerable level even for those who want to buy at 10,000," he said. Asia's second-biggest retailer, Ito-Yokado Co Ltd, lost 5.15 percent to 3,680 yen and top-ranked rival Aeon Co Ltd was down 5.35 percent at 3,360 yen.
Insurers, brokerages and banks also came under selling pressure as concerns mounted over the Tokyo market's outlook.
Millea Holdings Inc, Japan's biggest insurance firm, fell 4.55 percent to 1.47 million yen, helping send the sector subindex down 3.53 percent, the worst-performing sector on the Tokyo bourse's first section.
Toyota Motor Corp, Japan's biggest auto maker whose overseas sales account for about 65 percent of its total, fell 1.45 percent to 4,080 yen, its lowest close since June 4.
But a few exporters managed to snap their recent losing streaks, with Canon Inc, Japan's biggest maker of office machines, rising 1.21 percent to 5,010 yen. Canon hit a 2004 closing low on Friday.
Japan Petroleum Exploration Co Ltd, a resource development company, climbed 3.35 percent to 4,630 yen on the back of rising oil prices.
Aplus Co, Japan's fourth-ranked consumer finance firm, rose 4.89 percent to 279 yen after news on Monday that either Britain's HSBC Holdings Plc or Japan's Shinsei Bank would soon be selected to purchase the consumer finance unit of troubled bank UFJ Holdings Inc.