The index has lost more than 20 per cent since last Monday and nearly 40 per cent in the last month alone.

The broader Topix index of Japanese shares posted an even steeper fall of 7.4 per cent.

In Europe, markets followed the Asian lead, initially plunging but had pulled back most of their losses by the close.

London's FTSE index was down 0.79 per cent, while Frankfurt's DAX was up 0.91 per cent.

However, France's CAC 40 lost 3.96 per cent at 3067.35 points.

Patrick O'Hare at Briefing.com, which provides live market analysis, said: "It is fear that is driving the market and the prevailing fear now is that 2009 earnings estimates will need to be marked down considerably as global economies retrench.

"Another fear the market can't shake is the fear of forced selling by troubled hedge funds."

Volatile

The closing numbers in Asia capped a volatile day, with the Nikkei at one point on Monday morning trading up three per cent, before plunging once again.

Measures by Japan's prime minister failed to revive flagging market sentiment (Reuters)
Earlier moves by Taro Aso, the Japanese prime minister, to introduce measures to calm stock markets failed to revive flagging sentiment.

During an emergency meeting of the Japanese cabinet on Monday, Aso called for steps including tighter controls on short-selling and expanding a government fund to recapitalise banks to as much as 10 trillion yen ($106.1bn) from two trillion yen, Kyodo news agency reported.

In a further sign of the impact of the global economic slowdown, Japanese consumer electronics giant Canon said it was lowering its net profit forecast for 2008 by 25 per cent, due to the global slowdown and the strengthening of the yen.

The company said that the sharp recent falls on global markets had "increased concern over the impact to the real economy".

"Additionally, drastic fluctuations in exchange rates between major currencies have led to a heightened sense of uncertainty over the future," it said.

On Monday, a surprise statement from the Group of Seven (G7) leading industrialised nations hinted at further intervention, saying its members would co-operate to aid stability.

But that appeared to do little to immediately boost investor confidence.

Manila stocks dive

Elsewhere in Asia markets in Hong Kong, Australia and the Philippines also slid dramatically, with the Manila stock exchange at one point suspending trading for 15 minutes as circuit-breakers cut in when the market lost more than 10 per cent.

Philippine shares eventually ended the day down by 12.3 per cent, its lowest close since September 2004.

"This is the loss of confidence in the market," Emmanuel Soller, broker at EquitiWorld Securities Inc in Manila, told the Associated Press.

"Our fundamentals were ignored, we followed the US. But I believe there was an overreaction by investors."

In Hong Kong the Hang Seng index was down more than 12 per cent in late afternoon trade as investors continued to desert the market.

In South Korea meanwhile stocks went on a rollercoaster ride as the Bank of Korea announced it was cutting its key interest rate by three-quarters of a per cent, its biggest-ever rate cut.

That gave the market a brief shot in the arm, rising for the first time in a week and at one point trading up 2.9 per cent.

But investor nerves kept the market in flux and at one point the benchmark Kospi index was down by as much as five per cent.

At the close of trade, shares had managed to regain some ground, with the Kospi up 0.8 per cent.