The Nikkei ended down 0.6 per cent but off earlier lows today, hit by a late selling rush after the New York Times reported US brokerage Merrill Lynch & Co's third-quarter bond-related write-downs could be more than $2 billion above its earlier forecasts.
A stronger yen and weakness in US semiconductor shares after a disappointing earnings forecast by Texas Instruments earlier this week also dragged Tokyo shares down, with Tokyo Electron Ltd sinking to nearly a two-year low.
Nervousness ahead of the US trading day and economic indicators including existing home sales contributed to the volatility on renewed concerns about fallout from the subprime loan crisis.
The report that Merrill Lynch is expected to add more losses related to declining market values for collateralised debt obligations and other debt instruments prompted a slide in Asian stock markets.
But the Nikkei was already primed for selling by a slightly stronger yen and weakness in semiconductor shares, market participants said.
Canon Inc fell by 3.4 per cent to 5,730 yen.
Tokyo Electron ended down 1.9 per cent at 6,880 yen after earlier touching 6,850 yen, its lowest this year and the lowest since Nov. 22, 2005, when its shares fell to an intraday low of 6,810 yen.
The benchmark Nikkei closed down 92.19 points at 16,358.39. The broader TOPIX index was down 0.4 per cent at 1,563.86.