Tokyo shares suffered sharp falls and the market finished below the key 14,000-point level for the first time in almost two months as banking stocks continued to suffer.

The Nikkei 225 index tumbled 373 points or 2.6% to 13,779 after a 41-point fall Monday.

Tokyo stocks plunged on fears that soaring government bond yields would hurt corporate activity and the domestic economy.

Propelled by concern about a flood of new bond issues to fund the government's massive economic stimulus programs, the yield on the benchmark 10-year Japanese government bond rocketed to 1.900%, the first time it hit that level since September 1997, from 1.505% yesterday.

"The bond market's sharp fall was the major negative factor in the stock market," said Keiko Kondo, an analyst at Merrill Lynch Japan.

The impact was magnified by thin volume in the absence of many foreign investors for Christmas holidays and before a Japanese national holiday tomorrow, she added.

The near-term March Nikkei futures contract ended down 320 points at 13,680. The Tokyo Stock Price Index, covering all First Section issues, fell 16.66 to 1082.46.

Most sectors, with the notable exceptions of pharmaceutical and trading companies, finished down.

The Nikkei bank sub-index fell 2.3% as some investors worried that higher interest rates would erode banks' operating profits, hurting their efforts to write off bad debt.