Volume was thin ahead of a Japanese holiday on Wednesday, with investors reluctant to push prices down too far and some shares paring losses from lows hit shortly after the open.
"While it wouldn't be strange for the Nikkei to break the next support level later this week and it will be tough to make any upside progress, there might be a short-term rebound overseas, which could make Japanese shares appear oversold," said Takashi Ushio, head of the investment strategy division at Marusan Securities.
Wall Street skidded on Monday as a special US congressional committee was expected to fail to reach a deal after three months of talks on slashing the US budget deficit.
These expectations came to pass, although Moody's Investors Service said the US failure to agree on a deficit-cutting plan would not by itself trigger a ratings downgrade.
Concerns about Europe's debt situation persisted as well, with Moody's saying a recent rise in interest rates on French government debt and weaker economic growth prospects could be negative for France's credit rating.
The Nikkei had dropped 0.1 percent by the midday trading break to 8,337.52 after earlier falling as low as 8,261.01, well below support at the Oct. 5 low of 8,343.01.
The benchmark managed to remain above 8,227.63, the intraday nadir hit on March 15 in the wake of the earthquake and tsunami four days before.
The broader Topix index gained 0.1 percent to 717.93 after earlier falling to a new two-and-a-half-year low of 709.86. The Topix broke through its post-disaster low on Oct 5.
"The fact that the Topix has already broken its March low means that it's possible for the Nikkei to follow suit, with 8,000 the next Nikkei downside target level," Ushio added.
Resistance for the Nikkei lies at its 5-day moving average around 8,403.
VOLUME THIN
Volume was thin but in line with recent levels, with 788 million share changing hands in the morning session, compared to last week's average full-day volume of 1.39 billion.
Shares in scandal-hit Olympus Corp were up 15.5 percent at 837 yen, after earlier rising as much as 20.4 percent, continuing their climb from the previous session. The issue was the second-heaviest traded share on the main board by turnover.
Olympus said on Monday a third-party panel it appointed to look into an accounting scandal has so far found no evidence that funds from its M&A deals went to organised crime syndicates or that "yakuza" gangsters were involved.
DeNA Co Ltd fell 0.5 percent to 2,291 yen and topped the highest turnover list after KDDI Corp and Gree filed a suit on Monday against the mobile social gaming firm over claims that the Mobage game site operator was blocking content providers from supplying games to other platforms.
Gree added 1.7 percent to 2,659 yen and KDDI was down 0.2 percent at 544,000 yen.
Separately, DeNA denied a report it was being investigated by a securities watchdog and said it saw nothing suspicious in the fact that its share price fell before it announced it was buying a baseball team.
Kawasaki Kisen dropped 0.8 percent to 127 yen after Deutsche Securities cut its rating on the issue to "sell" from "hold," and said the company requires "far-reaching restructuring measures".