The Nikkei 225 index lost 0.65 percent, or 134.98 points, to close at 20,585.31 while the broader Topix index was down 0.44 percent, or 6.65 points, at 1,499.23.

In early trade, the key Nikkei index dropped more than 2.9 percent after Wall Street suffered its worst session of the year on concerns about an escalating US-China trade dispute.

But Tokyo shares recovered some of their early losses as the sharp fall prompted late bargain-hunting, said Daiwa Securities chief technical analyst Eiji Kinouchi.

"However, the late buy back does not mean sentiment improved," Kinouchi told AFP.

"The market is expected to be under pressure for now as prospects for the US-China issue remain uncertain," he added.

Beijing parried US President Donald Trump's latest tariff announcements by moving to let the Chinese yuan devalue and halting purchases of US agricultural products.

Trump fired back, with Washington formally designating China a currency manipulator.

Investor sentiment has taken a hit as the trade war between the world's two biggest economies has escalated quickly. After last week's tariffs announcement by Trump, the market was expecting a reaction from China, noted Rodrigo Catril, senior strategist at National Australia Bank.

"But based on recent behaviour, there was still some expectation for China to take its time while also aim for a more measured response," he said in a note.

"In the end, we got a little bit more than anticipated," he said, with Beijing letting its yuan fall to levels the Chinese authorities had previously been cautious to breach.

"We think it sends a signal that China is gearing up for a long trade battle with the US," he said.

"Recent events suggest a US-China trade deal is unlikely... any time soon and indeed it seems reasonable to expect trade tensions to get worse before they get better."

On Wall Street, the blue-chip Dow Jones Industrial Average sank 2.9 percent in the worst session of the year, the broad-based S&P 500 slumped 3.0 percent and the tech-rich Nasdaq Composite Index tumbled 3.5 percent.

A decline in the yen against the dollar also helped Tokyo shares recoup some of their early losses, Kinouchi said.

The dollar was trading at 106.68 yen in Asia afternoon trade against 105.95 in New York Monday afternoon.

Toyota tumbled 2.41 percent to 6,720 yen and Honda lost 0.21 percent to 2,560.5 yen, but Nissan rose 3.35 percent to 684.1 yen.   Panasonic plunged 2.02 percent to 829.3 yen.