Although the market pared more than half of its earlier losses, helped in part as the Chinese yuan steadied, sentiment remained cautious on heightening uncertainties over the global economic outlook.

The Nikkei share average fell 0.65% to 20,585.31, after diving 2.94% at one point and hitting its lowest since Jan. 10. The broader Topix lost 0.44% to 1,499.23.

"Trend-followers are boosting their short positions on the Nikkei futures. The Nikkei could fall another 800 points, with 19,000-19,500 increasingly seen as a target," said Masanari Takada, cross asset strategist at Nomura Securities.

A yearlong U.S.-China trade war took a sharp turn for the worse as Washington accused Beijing of manipulating its currency after China let the yuan drop to its lowest point in more than a decade.

Companies with exposure to global trade were badly hit as the yen has risen, hitting a seven-month high against the dollar  and 33-month high on a trade-weighted basis.

Toyota Motor and Softbank Group, Japan's two biggest firms by market cap with global presence, fell 2.4% and 2.9%, respectively.

Panasonic slumped 2.0%, having lost as much as 4.2% to hit 3-1/2-year lows while Honda Motor dipped 0.2%, hitting three-year lows.

The transport equipment maker index fell 0.8%, shedding as much as 3.3% to hit a three-year low.

Sharp falls in the market prompted buybacks in some of the most battered shares.

Steelmaker shares, one of the early victims of U.S. President Donald Trump's trade war, hit near seven-year lows before bouncing back 1.2% while brokerage shares also rose 1.2%, erasing earlier falls to three-year lows.

Suzuki Motor ended up 0.3%, recovering from an earlier fall of more than 10%, after the automaker posted disappointing quarterly earnings results due to a slowdown in India, the most important growth market for the firm. The shares have lost about half of their value from a record peak hit almost a year ago.

On the other hand, there were pockets of brightness in some earnings results.

Suntory Beverage & Food rose 5.1% after its April-June profits beat market expectations.

Subaru spurted 8.1% higher following its brisk earnings results.

Trading turnover surged to 2.637 trillion yen, more than 30% above the average over the past month.

The Nikkei volatility index rose to 26.41, also the highest since early January, before easing to 22.98.