The Nikkei average fell 1.4 percent on Tuesday to a nearly four-month closing low, as financial shares such as banks and property firms slid on continued credit worries.
But trade was cautious ahead of restructuring plans that General Motors Corp (GM.N) and Chrysler LLC CBS.UL are required to submit by Tuesday showing how they can be made viable after receiving $13.4 billion in emergency aid.
"Investors are selling stocks not only in Japan but in other Asian markets as they wait for restructuring plans from GM and Chrysler. There's a view in the market that they might not be able to submit it on time," said Soichiro Monji, chief strategist at Daiwa SB Investments.
"Although there's no specific news prompting a sell-off, shares of companies with credit worries are under pressure, such as real estate and financial firms."
Japanese Finance Minister Shoichi Nakagawa said on Tuesday that he would resign after passing the budget for next fiscal year, following criticism of his behavior at a weekend G7 news conference in Rome, though the news may be neutral for stocks.
"The resignation of Nakagawa wouldn't have an impact on the stock market, but if anything, it's positive that he'll do this after the budget is passed," Monji said.
The benchmark Nikkei .N225 shed 104.66 points to 7,645.51, its lowest finish since October 28 when it ended at 7,621.92.
The broader Topix lost 1.8 percent to 756.53.
GM was not expected to reach detailed agreements by the deadline but talks with both key groups made progress in the final day, people briefed on the discussions said.
"Investors want to see how things go with GM," said Hiroaki Kuramochi, chief equity marketing officer at Tokai Tokyo Securities. "If it were to end up filing for a bankruptcy or something, the stock market would face a sell-off."
After the bell, U.S. fund Steel Partners said it had withdrawn its proposal to acquire 33.3 percent of Japanese brewer Sapporo Holdings (2501.T), citing the firm's performance and refusal to negotiate with it.
Sapporo shares ended down 9.7 percent at 381 yen before the news.
FINANCIALS, PROPERTY FIRMS FALL
Bank shares slid in the wake of falls by their global peers after Friday's profit warning by Lloyds (LLOY.L), which revived concerns it could need more state funds or be fully nationalized due to deepening problems at subsidiary HBOS, which it bought last month.
Mitsubishi UFJ Financial Group (8306.T), Japan's top lender, lost 4 percent to 451 yen, while No. 2 bank Mizuho Financial Group (8411.T) slid 3.9 percent to 200 yen. Sumitomo Mitsui Financial Group (8316.T) fell 2.7 percent to 3,270 yen.
