TOKYO (Reuters) - Japan's Nikkei share average fell to a 3-1/2 month closing low on Tuesday, weighed down by exporters with exposure to Europe after Greece struggled to form a coalition government, increasing fears that it may have to leave the euro zone.
The Nikkei closed down 0.8 percent at 8,900.74, although it pulled back from the lowest intraday level since the beginning of February in the afternoon session, with traders suspecting the Bank of Japan of purchasing exchange-traded funds to support the market.
Tuesday's fall took the benchmark below technical support near 8,945, the 61.8 percent retracement of its rally from November to March.
The Nikkei has lost 13.2 percent since hitting a one-year peak of 10,255.15 on March 27 on concern over slowing global growth and the intensifying euro zone sovereign debt crisis. It is now deep in "oversold" territory, with the 14-day relative strength index at 27.3.
"Retail investors are getting washed out ... A lot of retails are getting margin calls," a dealer at a European bank said.
He and another trader said bearish bets on the Nikkei had increased, with some investors buying put options expiring in June at the levels of 8,250, 8,500 and 8,750.
Mazda Motor Corp, which has the highest exposure to Europe among Japanese automakers, dropped as much as 9.1 percent, before ending down 2.7 percent.
Honda Motor Co Ltd, Toyota Motor Corp and Nissan Motor Co Ltd lost between 2 and 2.8 percent.
Industrial robot maker Fanuc Corp, and camera and printer maker Canon Inc both eased 1.5 percent.
"The markets are in risk-off mode because everyone is thinking, if Greece leaves the euro, who's next?" said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley. "Portugal and Spain's credit-default swap spreads are sky-high; the domino effect has already begun."
The yen hovered near a three-month high against the euro, which was traded at 102.66 yen, pressuring Japanese exporters.
The broader Topix index dropped 1.2 percent to 747.40.
Trading volume on the main board hit its highest since April 27, with 2.06 billion shares changing hands.
"A resolution (in Greece) and the formation of a cabinet would make Japanese markets bounce right back up, but for the moment everything's being sold off, bar defensives and companies who've given good guidance," said Fumiyuki Nakanishi, general manager of investment and research at SMBC Friend Securities.
Taiyo Yuden Co Ltd, an electronic parts maker, forecast a return to profit this financial year, beating market estimates with its projection for 10 billion yen in operating profit. The stock surged 9 percent.
Goldman Sachs also recommended investors focus on companies with high earnings visibility and strong balance sheet.
"Until there is greater macro certainty, we retain our neutral market stance near-term. We believe stocks with better earnings visibility and relatively healthy balance sheets may continue outperforming in the short-run," it said in a note.
Sony Corp and Panasonic Corp rose more than 2 percent early on Tuesday after sources said the companies were in talks to jointly make next-generation OLED televisions, but reversed direction midmorning.
Sony finished down 2.3 percent and Panasonic fell 3.1 percent, both hitting fresh 32-year closing lows.
Social networking service operator Mixi Inc advanced 10.4 percent after the Nikkei Business weekly reported that its president was considering selling his 55 percent stake in the company.
The magazine said potential bidders included social gaming companies Gree Inc (3632.T), down 3.4 percent, and DeNA Co Ltd, off 3.5 percent.
Additional reporting by Sophie Knight; Editing by Chris Lewis