TOKYO Japan's Nikkei share average dropped to a three-week low on Monday as worries over the euro zone debt crisis heightened after Fitch Ratings warned of possible downgrades for seven European nations.
Market players said worries about Europe were pushing investors towards defensive stocks, keeping trading volumes thin and wiping out any improvement in sentiment that had been made on the back of a fall in U.S. weekly jobless claims and encouraging U.S. regional factory data.
"Investors are on the defensive and they are not reacting to U.S. macro statistics anymore," said Ryota Sakagami, chief strategist of equity research at SMBC Nikko Securities.
Fitch Ratings warned on Friday it may downgrade France and six other euro zone countries, saying a comprehensive solution to the region's debt crisis was "technically and politically beyond reach."
The benchmark Nikkei .N225 had fallen 0.8 percent to 8,331.00 by the midday trading break, while the broader Topix index .TOPX lost 0.9 percent to 717.39.
"Until the fiscal discipline pact is finalized at the European Union summit next year, markets are not expecting anything proactive, so investors can't budge from their wait-and-see stance," said Sakagami.
The Nikkei remained below its 25-day moving average near 8,477 on Monday, now seen as a key resistance point.
Market participants expect some support to come from the Bank of Japan's buying of exchange-traded funds and from bargain-hunting by pension funds.
"For the Nikkei to rise higher it needs European and U.S. shares to rise ... There might be some short-term catalyst for gains in New York if Washington passes the payroll tax cut extension tonight," said Takashi Hiroki, chief strategist at Monex Inc.
But a temporary extension of an expiring tax break was in jeopardy in Washington, where Republican lawmakers remained opposed to key provisions in the Senate bill.
Shippers and securities were the biggest percentage losers on the main board, with Tokyo's sea transport subindex .ISHIP.T falling 2.7 percent and the securities subindex .ISECU.T dropping 3.5 percent.
Nissan Motor Co (7201.T) bucked the trend, rising 3.4 percent to 691 yen, becoming the heaviest-traded share by turnover on the main board after the automaker said it would buy up to 0.3 percent of its shares outstanding for as much as 10 billion yen between Monday and Thursday.
Rival Toyota Motor Corp (7203.T) was flat, while Honda Motor Co (7267.T) lost 0.3 percent.
Nissan also said it will convert its subsidiary Aichi Machine Industry Co 7263.T into a wholly owned unit in March.
Aichi Machine, which supplies engines and transmissions to the automaker, soared 30.6 percent to 273 yen, topping the main board as the biggest percentage gainer.
Scandal-hit Olympus Corp (7733.T) shed 7.7 percent to 927 yen, continuing its fourth day of losses, after media reports that the Tokyo police, prosecutors and the securities watchdog were preparing to raid its offices this week as the firm struggles with a $1.7 billion accounting scandal.
(Additional reporting by Hideyuki Sano; Editing by Joseph Radford)