Tokyo stocks closed 0.99 percent lower on Friday, giving up morning gains as divided US lawmakers appeared set to head home for the holiday break without a deal on the fiscal cliff.
The benchmark Nikkei 225 index slipped 99.27 points to 9,940.06, while the broader Topix index of all first-section shares was off 0.70 percent, or 5.89 points, at 832.72.
The Nikkei had jumped to a strong start, gaining 1.06 percent at the open on a weaker yen and overnight Wall Street rally amid strong hopes for a deal on the fiscal cliff package of tax hikes and spending cuts.
But the yen reversed course in morning Asian trade, weighing on exporters' shares, while hopes for an immediate budget deal in Washington fizzled.
Republicans scrapped a vote on a "Plan B" to avert the fiscal cliff, saying they would not return to the negotiating table until after Christmas, further delaying already bogged-down talks.
"There has definitely been a knee-jerk reaction in the markets, but this may not be cataclysmic," an equity strategist at a foreign brokerage told Dow Jones Newswires.
"This smacks of merely needing to take the discussions off-line. Politicians, particularly on the conservative (Republican) side, obviously need to confer amongst themselves before resuming talks with the president."
The Dow Jones Industrial Average ended Thursday up 0.45 percent at 13,311.72 as the market appeared to show optimism about reaching a deal before a January 1 deadline that would see the fiscal cliff package come into effect, and likely push the world's biggest economy into recession.
Revised data that showed the US economy expanded 3.1 percent in the third quarter, faster than previously estimated, helped boost optimism about the country's prospects, as did strong November home sales.
In Tokyo stock trading, Toyota slipped 2.44 percent at 3,785 yen, Nikon was off 2.28 percent to 2,393 yen and factory automation giant Fanuc edged down 1.59 percent at 14,830 yen.
Sony was down 1.62 percent at 906 yen while Panasonic lost 1.37 percent to 501 yen.
On currency markets, the yen gained ground despite fresh Bank of Japan policy easing measures on Thursday. Speculation about the central bank move had earlier pushed the yen to multi-month lows.
The dollar bought 84.09 yen, slipping from 84.38 yen in New York on Thursday, while the euro fetched 111.08 yen, from 111.72 yen in US deals.
The European currency was quoted at $1.3208, edging down from $1.3241.