TOKYO Japan's Nikkei share average fell to its lowest close in a week on Tuesday on growing concerns this week's summit of European leaders will fail to make any significant progress in tackling the region's debt crisis.
Worries over the euro zone boosted the appeal of the Japanese currency, which weighed on exporters, although gains in defensive stocks offered some support.
The Nikkei closed 0.8 percent lower at 8,663.99, holding below 8,714.78, the 23.6 percent retracement of its fall from March 27 to June 4.
"The biggest elephant in the room is Europe, but there are other elephants now entering," said Stefan Worrall, director of equity cash sales at Credit Suisse in Tokyo.
On top of the EU crisis, rising Middle East tensions and concerns over China's growth were "making it difficult to see the outlook or longer term investment opportunity with any clarity," Worrall said.
Since hitting a six-month low on June 4, the benchmark Nikkei has gained 5.2 percent, but it is down 14 percent in the quarter, on track for its worst quarterly fall in two years.
Two traders said investors had not been active in buying Nikkei put options this week as protection against a further drop. "Everybody thinks 8,500 is a pretty solid line," one of the traders said.
TDK Corp, Honda Motor Co Ltd and Canon Inc were down between 1.4 and 2.8 percent.
Nippon Electric Glass Co Ltd sagged 7.8 percent to a two-week low after the company cut its net income forecast to zero for the quarter ending June 30, from a previous estimate of 500 million to 3.5 billion yen, citing securities appraisal losses.
The glass and ceramics index lost 1.8 percent.
The sector's one-month earnings momentum - analysts' earnings upgrades minus downgrades as a percentage of total estimates - deteriorated to minus 22 percent this month from minus 16 percent in May, data from Thomson Reuters Datastream showed.
The broader Topix's earnings momentum worsened to minus 2.3 percent from 0.1 percent last month.
The Topix was down 0.9 percent at 738.89 on Tuesday. Trading volume on the index hit a two-week high, with nearly 1.81 billion shares changing hands.
Defensive stocks were in demand with telecommunications firm KDDI up 0.4 percent, Japan Tobacco adding 2.1 percent and the utility sector rising 0.4 percent.
Japan's lower house approved a plan to double the sales tax to help curb the country's mushrooming public debt after a breakthrough deal between the ruling bloc and the opposition.
But the compromise could split Prime Minister Yoshihiko Noda's Democratic Party after public broadcaster NHK on Tuesday reported that 57 of its lawmakers failed to back the bill. If they were to leave the party, the Democrats will lose their majority in the more powerful lower house, raising the prospect of an early election.
(Editing by Richard Borsuk)