TOKYO Japan's Nikkei average shed 3 percent on Friday to log a seventh straight week of losses, its longest such run since the third quarter of 2001, as investors sold stocks and other risky assets on concerns over slowing global growth and a deepening euro zone crisis.
The Nikkei fell 265.28 points to 8,611.31, taking its decline to 16 percent since hitting a one-year high on March 27. Should the benchmark extend losses next week, to around 8,200, it would technically enter a bear market.
Friday's sell-off was the Nikkei's biggest one-day percentage drop since August. It came on the back of mounting worries over Spain's banking system after a report - denied by Spain - that customers at nationalised Bankia had withdrawn 1 billion euros from the lender over the past week and Moody's cut debt ratings of 16 Spanish banks.
"The stocks everyone bought in March are now getting blasted, and foreign investors have to keep selling to maintain their margins," said Norihiro Fujito, general manager at Mitsubishi UFJ Morgan Stanley.
"It's a negative spiral and makes the market very weak."
Adding to the gloom, U.S. economic data came in weaker than expected on Thursday, dampening hopes for a U.S. recovery, while dealers of Caterpillar Inc, the world's largest maker of earth-moving equipment, reported slowing growth in their sales in April.
Caterpillar's Japanese rivals took a heavy beating, with Hitachi Construction Machinery Co Ltd sagging 9.6 percent, Komatsu Ltd sinking 5.7 percent and Kubota Corp down 5.3 percent.
A senior trader at a foreign bank said investors were banking on volatility options as protection against further falls on the Nikkei.
"The vol levels like the 8,500 puts, 8,250 puts have been bid up recently. The skew indicates there is more interest to buy downside protection," he said.
The Nikkei volatility index jumped 25.3 percent to its highest level since early December. The higher the volatility index, the lower the risk appetite.
The broader Topix fell 2.9 percent to 725.54, taking the index to negative territory this year after rallying 17 percent in January-March to log its best first-quarter performance in 24 years.
About 2.05 billion shares changed hands on the main board, down from Thursday's 2.08 billion shares but up from last week's average of 1.82 billion.
FINANCIALS, EXPORTERS BATTERED
Financials were also hit hard on concerns about the possible broader impact from ailing Spanish banks. Nomura Holdings, Japan's top investment bank, shed 5.6 percent, while lenders Mitsubishi UFJ Financial Group and Mizuho Financial Group both lost 3.4 percent.
The sector was also weighed down by a Fitch Ratings report that the world's top 29 banks may need a total $566 billion to meet tougher new capital rules, cutting returns by a fifth and forcing them to curb investor payouts and raise customer charges.
"Almost everybody is trading for no longer than a couple of days now and the hedge funds are trying to make hay out of this by shorting stocks aggressively," another trader said. "They just have the market to themselves and can knock stocks down because there's nobody to support them."
However, Nomura technical analyst Shoichiro Yamauchi said the sharp pullback from March 27 was approaching its trough as short interest ratio on Japanese equities reached 29.7 percent on Thursday, near the 30 percent level that has often marked a bottom in the past.
Technicals also showed the Nikkei was deep in "oversold" territory, with its 14-day relative strength index at 23.8. Thirty or below is considered oversold.
Apart from the prospect of weakening global demand, exporters were also pressured by a firmer yen, which tends to strengthen in times of uncertainty. The yen was last traded at 79.23 to the dollar and 100.33 to the euro.
Toyota Motor Corp, Sony Corp, Canon Inc and industrial robot maker Fanuc Ltd were down between 2.7 and 5.3 percent.
(Additional reporting by Sophie Knight; Editing by Muralikumar Anantharaman)