Interest rate-sensitive shares, such as banks, real estate and construction, also fell on the recent rise in government bond yields.

The Nikkei 225 tumbled 426.28 points, or 3.1%, to 13,415.89, its lowest closing level since 16 October when it ended at 13,280.54.

"Players are worried about a continued decline of the dollar and the uncertain outlook for the US economy," said Kunihiro Hatae, general manager at Tokyo Securities.

Masaru Arai, general manager at Ryoko Securities, said the Nikkei 225 may fall as low as 12,000 in the first quarter of 1999 as institutional investors rush to unwind cross-shareholdings amid a bearish market outlook.

International blue chips were sharply down after the dollar again briefly fell below ¥113.00. Sony lost ¥180 to Y8050, Toyota fell ¥115 to ¥2955 and Honda retreated ¥130 to ¥3580. NEC, Fujitsu, Fuji Photo, Bridgestone, Aiwa, Advantest, Kyocera, Hoya and Canon were all weaker.

TDK and Tokyo Electron were among the few gainers among blue chips this session.