The benchmark Nikkei 225 index closed down 4.73 percent or 1,071.84 points at 21,610.24, after diving more than seven percent earlier.

It was the worst single-day fall in percentage points since the November 2016 election of US President Donald Trump.

The broader Topix index slumped 4.40 percent, or 80.33 points, to 1,743.41.

"Investors fled to sell after the large drops on Friday and Monday" on Wall Street, said Toshihiko Matsuno, analyst at SMBC Nikko Securities.

"The gains since the turn of the year were rapid and the sudden downturn came as a shock," he told AFP.

World markets had enjoyed a stellar rally in recent months -- with the Nikkei hitting a 26-year high in January -- thanks to a healthy global economy and robust corporate earnings.

But selling kicked in last week after another strong US jobs report heightened expectations the Federal Reserve would quicken its pace of interest rate rises, as the era of easy money draws to an end.

Friday's jobs reading also came as US benchmark 10-year Treasury bill yields sit at four-year highs, intensifying jitters among investors worried about high borrowing costs.

Markets are now entering "a correction phase", Matsuno added. "It's natural that we see a correction, though the pace is a bit too fast."

Japanese exporters were also hit by the stronger yen, which attracts safe-haven buying in times of uncertainty.

The dollar fell to 108.80 yen from 109.13 yen in New York and was well down from the levels around 110 yen seen earlier Monday in Asia.

A strong yen hits Japanese exporters as it makes their products less competitive abroad and erodes profits when repatriated.

Toyota closed down 2.86 percent at 7,286 yen before the auto giant said it was expecting a record net profit for the year ending in March.

Sony tumbled 4.16 percent to 5,336 yen and Nintendo plunged 5.20 percent to 44,470 yen.

But Mitsubishi Motors rose 1.46 percent to 830 yen after posting strong earnings after the market closed on Monday.