Japanese shares fell on Monday as a report that financial authorities had found additional bad loans at UFJ Holdings Inc spurred selling in banks as well as property and steel stocks.
Investors also grabbed profits in technology shares after the US Nasdaq Composite broke below 2,000 last Friday and concerns over global security were rekindled by Israel's assassination of a leader of Palestinian militant group Hamas.
"Bank shares had risen sharply lately and investors used the news about UFJ to take profits," said Yutaka Miura, deputy manager of equity information at Shinko Securities.
The Nikkei average ended down 0.51 percent at 11,764.21 while the broader TOPIX index lost 1.10 percent to 1,182.97.
Bank shares took a beating after the Tokyo Shimbun newspaper reported that Japan's banking watchdog had found an additional one trillion yen ($9.24 billion) of problem loans at UFJ, the smallest of Japan's four mega-banking groups.
UFJ fell at one point by as much as 14.1 percent, its daily limit, to 610,000.
It closed down 8.31 percent at 651,00 yen, the worst performer among the Nikkei 225 components, pulling its peers down.
Mizuho Financial fell 2.94 percent to 496,000 and Mitsubishi Tokyo Financial was down 1.96 percent at one million yen.
Goldman Sachs said on Monday that the report on UFJ was within its estimates and it retained its outperform rating on UFJ with a 12-month share price target of 1.09 million yen.
Yoshihiko Kosuga, deputy general manager at Mizuho Investors Securities Co Ltd, said the Goldman report eased concerns but many investors were still not in a rush to return to UFJ shares.
"We can wait until the inspection results are out," he said.
The FSA has completed its third round of special inspections at the top banks and is to present its findings later this month.
Ahead of earnings reports by US high-tech giants like Motorola Inc and Microsoft Corp, investors also shunned Tokyo Electron, which slipped 1.15 percent to 6,860 yen, and Advantest Corp, which fell 0.7 percent to 8,550 yen.
Hitachi Ltd ended down 0.13 percent at 786, after earlier rising as much as 2.4 percent on a news report that the company would post sharply higher profits for 2004/05 thanks to improved earnings at its hard disk drive unit.
Investors also dumped recent high-flyers like property, construction and steel shares as a bearish tone dominated the market.
Builder Taisei Corp fell 3.99 percent to 385 while property developer Mitsui Fudosan Co dropped 4.22 percent to 1,225 yen.
Kobe Steel Ltd also slipped 1.21 percent to 163 yen. Steel shares have posted hefty gains over the past year thanks to strong demand in China, and traders said investors would likely focus on Tokyo Steel Manufacturing, which is scheduled to announce its 2003/04 earnings results on Tuesday.
Kenichi Azuma, an equity strategist at Cosmo Securities Co Ltd, said the Japanese stock market needed a correction and should rebound, possibly by the end of this week, with domestic institutional investors keen to scoop up stocks on dips.
But Kosuga of Mizuho Investors said the Nikkei at one point broke below the 25-day moving average of 11,727.21 on Monday and the benchmark could fall further.
Trade volume picked up with 1.708 billion shares changing hands on the first section, against 1.701 billion shares on Friday. Decliners outnumbered advancers 1,140 to 348.
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