Investor skepticism about the economic strategies of Prime Minister Shinzo Abe for extricating Japan from two decades of stagnation also figured high in the Nikkei 225's big drop.
"The markets have been nervous for some time, and there was disappointment among some investors," said Katsuyuki Hasegawa, chief market economist at Mizuho Research Institute in Tokyo.
Japanese media reports said overseas hedge funds may be dumping Japan's equities following disappointment over the Bank of Japan's decision earlier in the week to refrain from additional monetary easing measures.
The Nikkei 225 index plunged 6.4 per cent to close at 12,445.38. Adding to the woes was the dollar's recent fall, trading at about 94 yen late Thursday, slipping momentarily to 93-yen levels. A cheap yen is a boon for Japan because it helps the nation's giant exporters by raising their overseas revenue when translated into yen.
In early European trading, Britain's FSTE 100 fell 1.2 per cent to 6,223.75. Germany's DAX fell 1.9 per cent to 7,987.19 while France's CAC-40 shed 1.2 per cent to 3,749.03. Ahead of the opening bell, Wall Street appeared headed for losses. Dow Jones futures fell 0.5 per cent to 14,908 while S&P 500 futures lost 0.5 per cent to 1,601.70.
Elsewhere, the Hang Seng index fell 2.2 per cent to 20,887.04, while the Kospi in South Korea lost 1.4 per cent to 1,882.73. Thailand's SET fell 3.8 per cent. The Philippines PSE Composite index lost 6.8 per cent.
Mainland Chinese were pummeled as accumulating signs of a slowdown in growth in the world's No. 2 economy caused investors to retreat. The Shanghai Composite Index slid 2.8 per cent to 2,148.36, its lowest close in six months.
"Investors are gloomy over the future economic outlook. It would be hard for the market to go up in the long term," said Cai Jing, an analyst at Yintai Securities, based in Shanghai.
Juichi Wako, equity market strategist at Nomura Securities Co. in Tokyo, said the drop in Asia was due to a reversal of the money flow that had flooded Japan in recent months, partly on inflated hopes for "Abenomics," as Abe's fiscal and monetary policies have been dubbed.
Much of the overwrought excitement was calming and the money was reverting to the U.S., where monetary easing might be winding down, he said.
"The market is starting to get bored with all the talk about turning around Japan. People want to see action on Abenomics, not just talk," said Wako.
In April, the Bank of Japan announced a massive stimulus in an attempt to get inflation up to 2 per cent. The euphoria that drove the Nikkei up to five-year highs has since dissipated and the index is now around 20 per cent down from its recent peak.
A major driver in markets has been the uncertainty over the future course of U.S. monetary policy following a solid, if unspectacular, improvement in economic data.
The markets now expect some reduction in the Federal Reserve's monthly asset purchases sometime this year. The stimulus has been one of the main reasons why many assets, such as global stock markets and emerging markets, have bounced back.
Analysts said markets will likely remain on edge until next week's Fed policy meeting for greater clarity on the timing and extend of any tapering.
"Risk appetite continues to shrink as the ongoing nervousness over Fed tapering continues to provoke significant position adjustments across markets," Mitul Kotecha of Credit Agricole CIB in Hong Kong said in a market commentary.
Among individual stocks, Apollo Tyres Ltd., an Indian company, plunged nearly 25 per cent after announcing plans to buy American tire maker Cooper Tire & Rubber for $2.5 billion.
Japan's chief government spokesman Yoshihide Suga tried to allay the growing fears.
"We need to stay calm," he told reporters. "The real economy and leading indicators are showing recovery so we are confident about our measures."
The euro rose to $1.3340 from $1.3331 late Wednesday in New York. The dollar fell to 94.34 yen from 95.71 yen.
Benchmark crude oil was down 69 cents at $95.19 per barrel in electronic trading on the New York Mercantile Exchange. The contract rose 50 cents to close at $95.88 on the Nymex on Wednesday.
AP Business Writers Pamela Sampson in Bangkok and Elaine Kurtenbach in Tokyo contributed to this report. Research Fu Ting contributed from Shanghai.
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