The Nikkei average hit its lowest in two months below 10,000 on Monday, with

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exporters such as Sony Corp hurt by a stronger yen, while anxiety over fiscal problems in Europe continued to dent investor confidence.

Beer maker Kirin Holdings extended falls to more than 4 percent after saying that it and fellow beer maker Suntory had scrapped a plan to create one of the world's largest food and beverage makers, citing differences over governance and a merger ratio.

But Toyota Motor Corp edged up 0.6 percent after its president apologised on Friday for safety problems and said the automaker would bring in outside experts to review quality controls.

In a sign that its recall woes continue, though, a dealer said on Sunday that Toyota has decided to recall its new Prius hybrid in Japan to fix a braking software glitch.

"There's continuing worry over Europe's fiscal situation and investors are now avoiding risk in general, making the Nikkei's fall today unavoidable," said Noritsugu Hirakawa, a strategist at Okasan Securities. "This is especially true after the weekend Group of Seven meeting which, while they did discuss Greece's fiscal problems, didn't come up with anything concrete to deal with it. Their talks just seemed like an exchange of opinions."

The benchmark Nikkei was down 0.4 percent or 38.61 points at 10,018.06 after earlier falling as far as 9,952.64, its lowest point in two months, and appeared on track for its lowest close in two months as well. The broader Topix lost 0.5 percent to 887.64.

The dollar and yen gained on Friday as persistent worries about the euro zone's fiscal stability, particularly in countries like Greece and Portugal, pushed investors further away from riskier assets. On Monday the euro was down 0.5 percent at 121.75 yen, after falling as low as 120.64 yen on Friday to its lowest since Feb. 24, 2009. The dollar was trading around 89.27 yen after earlier falling further towards 89 yen.

Investors fret about a stronger yen as it eats into exporters' profits when they are repatriated.

Sony Corp slipped 2.3 percent to 3,015 yen, while Honda Motor Co declined 1.1 percent to 3,065 yen.

Panasonic lost 5.2 percent to 1,319 yen after market analysts said UBS had downgraded the stock to "neutral" from "buy", with additional downward pressure from the yen.

The move came even though the electronics maker reported on Friday that its quarterly profit jumped more than threefold to the highest level in five quarters as it cut costs and enjoyed robust TV sales, and lifted its outlook to beat market expectations.