Tokyo stocks have opened 1.69 per cent lower after Wall Street closed down and the euro fell back as optimism faded over a weekend bailout deal for Spanish banks.
The Nikkei 225 index at the Tokyo Stock Exchange opened down 146.12 points at 8,478.78 on Tuesday. The benchmark index was hovering around the opening level after the first 20 minutes of trading.
The bearish opening came after the Dow Jones Industrial Average ended 142.97 points [1.14 per cent] lower at 12,411.23 in New York.
An early rally in New York prompted by Spain's banking bailout fizzled out and US stocks headed into negative territory, as the reality of more imminent risks confronting the eurozone sank in.
The yield on Spain's 10-year bond rose to 6.48 per cent on Monday, higher than Friday's close, after Fitch, the ratings agency, downgraded Spain's two largest banks.
The euro weakened overnight, losing a bounce from the 100bn euro ($125bn) deal for Spanish banks.
The common currency, which rose past $1.26 in Asian trade on Monday, bought $1.2480 early on Tuesday, compared with $1.2482 in New York late on Monday.
Against the Japanese currency the euro fell to 98.83 yen from 99.13 yen in New York.
Abid Ali | Business Editor
With a recession in Spain lasting until the end of 2014 at the very least, a banking bailout will push Madrid into asking for a sovereign bailout.
Its current bailout has no austerity string attached. More austerity would be a disaster for Europe’s fourth-largest economy. Portugal, Ireland and Greece must be looking at this and considering going back to the troika – IMF, EU, ECB - asking for more lenient terms.
Citigroup expects the Spanish economy to contract 2.7 per cent this year, compared to official estimates of 1.7 per cent.
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The dollar eased to 79.23 yen from 79.43 yen.
European officials agreed on Saturday to lend Spain up to 100bn euros ($125bn), a move which should have made Spanish bank debt look less risky.
However, investors soon began to worry about details such as how the deal would be structured and whether it would come with conditions.
Investors also worried that if the eurozone's future permanent bailout fund, the European Stability Mechanism, is used for the rescue, they will be subordinate to official creditors and face losses in any debt restructuring.
Risks of further credit rating cuts would keep borrowing costs elevated.
On the bond market, the yield on Spanish 10-year government bonds - an indicator of investor confidence of how well Spain can maintain its debts - turned flat at 6.26 per cent, while the cost of insuring Spain's debt against default rose slightly.
Luis de Guindos, Spanish economy minister, had insisted on Sunday the deal was not a rescue but a loan that imposed conditions only on the country's banks.
However, it marked a dramatic climbdown for Spain, which had hotly denied any need for outside aid to prop up its troubled banking system.
Mariano Rajoy, the Spanish prime minister, said on Sunday that the eurozone deal had secured for Madrid a "line of credit" for the country's debt-stricken banks that would ensure the "credibility of the euro".
He insisted his government's reforms since taking power in December had averted the need for a broader state bailout.
"If we had not done what we have done in the past five months, the proposal yesterday would have been a bailout of the kingdom of Spain," Rajoy said.
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"What happened yesterday was part of a global plan to clean up the Spanish economy and to lead to the creation of employment and economic growth.
"We have to make these decisions to come out of the crisis."
Rajoy insisted that Spain had not caved in to pressure from other nations and from the financial markets, which have sent Spain's borrowing costs soaring on concerns over its banks and mushrooming debt.
Spain's bailout means that it joins the other members of the so-called PIGS economies - Portugal, Ireland and Greece - by tapping international rescue funds to stave off the threat of bankruptcy.
But with a GDP of $1.3tn, the fourth largest in the eurozone, Spain's economy is twice the size of the other bailed-out countries combined.