Tokyo's benchmark Nikkei average closed 338.56 points or 2.38 per cent lower at 13,859.14 -- its lowest since 13,807.46 on March 5, 1986. Hong Kong shares finished almost four per cent lower, partly dragged down by Tokyo, and Singapore closed marginally down after investors decided to cash in on three straight days of index rises.

Hong Kong's Hang Seng Index shed 284.11 points, or 3.61 per cent, to finish at 7,576.57 after hitting a low of 7,555.54. "There is a bit of profit to be taken because a number of stocks have risen pretty strongly from low levels and the world is still fairly shaky," said Howard Gorges, director at South China Brokerage.

Jakarta stocks ended down 5.44 points, or 1.87 per cent at 285.48 points, with sentiment seen remaining weak over fears of fresh unrest and rumours currency controls may be clamped on.Malaysian shares ended down 7.49 points, or 1.90 per cent, to 386.55 as retail players took profits, dealers said.

A dealer at a foreign brokerage said overseas investors remained confused and unnerved by Malaysia's decision to impose strict capital and foreign exchange controls from September 1.

South Korea stocks closed down 2.29 points or 0.73 percentage at 310.88, as selling by local institutions and private investors offset a return of foreign buyers in the market, brokers said.

Australian stocks also closed marginally lower on a dose of investor caution in the run-up to National elections, but Manila bucked the trend, zooming eight percent to end at a three-week high on takeover talk about a local telephone firm, traders said.

In Tokyo, concern over the banking system and a surge in government bonds sucked money out of the market, traders said. Disillusion over an expected compromise on a plan to handle ailing Long-Term Credit Bank of Japan weighed on the market. LTCB closed down three yen at22. "It's a warning shot to investors who hold on to weaker banks," said James Fiorillo, Financial analyst at ING Baring Securities.

A rally in Japanese government bonds also helped undermine equities, drawing cash out of the market. Although JGB yields are at record lows, analysts say investors will stick with fixed-income products over riskier equities.

"Players are looking to preserve rather than expand capital," said Martin Foster, senior analyst at Standard & Poor's MMS. "Bonds are a risk-free asset as long as Japan isn't downgraded. Stocks are 100 percent risk."

The dollar rebounded from its low against the yen in late Tokyo trade, supported by rounds of short-covering late in the afternoon in response to the falls in Japanese stocks and domestic interest rates. Dealers said late rounds of bids from interbank operators drove the greenback above key resistance around 134.40/50 yen in late trade.

Federal Reserve Chairman Alan Greenspan's testimony to Congress on Wednesday, that there was noconcerted effort among G7 nations to lower interest rates, also jangled brokers' nerves.

Singapore's Straits Times Index (STI) ended down 0.56 per cent, or 5.33 points, at 941.42 after touching a morning high at 964.08. An early buying spurt fizzled out when investors took profits after three days of gains, brokers said. The index had gained some 13 percent from Friday before profit-taking knocked it down.

Some brokers said the market seemed to lose direction after Greenspan dashed hopes of an interest rate cut. "This seemed to hammer on some regional markets, including Singapore," one local broker said.

Australia's benchmark All Ordinaries index closed down 10.4points or about 0.4 percent, at 2,542.8, having spent most of the day meandering in an eight-point trading range. "We have had some volatile times of late but things seem to be quietening down as we head to the election," said Austock Brokers research director David Perry.