Tokyo stocks slipped 0.34 percent by the break on Tuesday as bargain-hunting fizzled out and gave way to a stubbornly high yen and fears about a US budget deadlock.
The benchmark Nikkei 225 index at the Tokyo Stock Exchange was down 29.16 points at 8,647.28, while the broader Topix index of all first-section shares dropped 0.32 percent, or 2.31 points, to 720.27.
The Tokyo market started the morning session in positive territory as investors scooped up bargains after the Nikkei closed Monday at its lowest level since mid-October.
But the rally quickly ran its course, dealers said, with the strong yen weighing on exporters.
Traders have turned to the safe-haven yen as eurozone worries were stoked by news that the bloc's finance ministers delayed until next week a final decision on disbursing the next tranche of bailout cash for Greece.
The currency's rise came even as official data Monday showed Japan's economy contracted in the latest quarter, nudging the world's third-largest economy toward recession and renewing pressure on the Bank of Japan to launch further stimulus, which would tend to weigh on the yen.
There are also simmering fears over the US fiscal cliff of spending cuts and tax hikes slated to come into effect on January 1 unless a bitterly divided Congress agrees a new spending plan.
Failure to reach an deal could see the package kick in, likely sending the US economy into recession.
In stock trading, major Japanese exporters fell with camera and office equipment maker Canon losing 0.65 percent to 2,437 yen, while Sony was down 0.23 percent at 854 yen and automaker Honda gave up 0.29 percent to 2,351 yen.
Olympus jumped 5.06 percent to 1,307 yen after saying Monday that it had swung back to profitability and raised it full-year net profit view as it moves on from an embarrassing accounting scandal.