The benchmark Nikkei 225 index at the Tokyo Stock Exchange fell 108.34 points to 8,676.12. The broader Topix index of all first-section issues was down 8.03 points or 1.06 percent at 747.79.
Exporters fell while "defensive" sectors such as foods, pharmaceuticals and utilities that are usually resilient in economic slowdowns bucked the general downtrend, brokers said.
"The Greek debt problem is of utmost concern on most investors' minds," said Hideyuki Ishiguro, a strategist at a Japanese securities firm, noting the upcoming Greek sovereign debt rollover deadline.
"It's too scary to buy stocks before we find out how this will pan out," he told Dow Jones Newswires.
TDK fell 1.92 percent to 3,060 yen and Sony dropped 1.41 percent to 1,538.
Financial stocks also fell as their European counterparts sustained heavy losses overnight. Nomura Holdings was down 3.24 percent at 298 yen, with Mitsbishi UFJ Financial Group down 2.09 percent at 327 yen.
European shares tumbled on Monday with banks hit particularly hard by acute tension over the risk of recession in leading economies and over eurozone debt.
Bonds issued by Greece and Italy fell, and the cost of insuring against default by Italy and France rose sharply.
The euro was trading at $1.4073 and 108.12 yen in Tokyo midday trade, down from $1.4109 and 108.57 yen late Monday afternoon in London. The US markets were closed Monday due to the Labor Day holiday.
Toshiba plunged 5.75 percent 295 yen Tuesday after the Wall Street Journal reported the firm is in talks to buy out Shaw Group's 20 percent stake in US nuclear power plant company Westinghouse Electric.
"The decision may have been viewed positively if it had before the (Japan) nuclear accident," Toshiyuki Kanayama, a senior market analyst at Monex, said, referring to the crisis at the Fukushima plant hit by the March tsunami.
"But it's difficult to understand the need to increase its stake in Westinghouse now when domestic sentiment on the nuclear power business is sour," he said while recognising continuing demand in the US and emerging countries. Toshiba currently owns 67 percent of Westinghouse.
Copyright AFP (Agence France-Presse), 2011