The Nikkei average hit its lowest in two months on Tuesday, with shares of

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exporters falling as heightened concerns about the euro zone's sovereign debt troubles continued to hurt investor confidence.

Toyota Motor Corp climbed 3.1 percent on short covering as the company prepares for a global recall of its new Prius model, while Sumitomo Mitsui Financial Group rose after posting its biggest profit in seven quarters.

Toyota intends to file its Prius recall plan at Japan's transport ministry around 0430 GMT, a source with knowledge of the matter said.

"We still don't have a clear idea of what will happen with the fiscal problems in Europe and the market is concerned that increased risk-aversion will result in a shrinking of overall trading activity," said Kazuhiro Takahashi, general manager at Daiwa Securities Capital Markets.

The benchmark Nikkei was down 0.4 percent at 9,907.65, after falling as low as 9,867.39, its lowest since Dec. 10.

The broader Topix retreated 0.4 percent to 879.19.

The Dow Jones industrial average slid 1 percent on Monday to 9,908.39 as investors sold bank shares due to worries about the debt problems in Europe.

Concerns about the fiscal stability of Greece, Portugal and Spain have rattled global markets over the last two weeks, curbing appetite for riskier assets.

Trade was choppy in Tokyo, with the Nikkei briefly swinging into positive territory, as some market players said investors' buying on dips was providing support.

"A majority of investors seem to think stock prices have become rather cheap after the Nikkei broke below 10,000," said Makoto Haga, chief strategist at Monex, a Tokyo-based brokerage.

"Corporate earnings reports have also been good, and it's hard to keep selling when earnings are solid."

TOYOTA GAINS

Exporters fell, with Advantest Corp sliding 2.1 percent to 2,051 yen and Honda Motor Co declining 0.5 percent to 3,020 yen.

But Toyota rose to 3,380 yen, on what market players called short covering.

Toyota shares, which have lost about a fifth of their value since late January, dropped another 2.5 percent on the New York Stock Exchange on Monday.

"Shares fell while Toyota appeared not to be doing anything to deal with its problems, but now the fact that they're taking concrete steps on the issue is being seen as positive," said Hiroaki Osakabe, a fund manager at Chibagin Asset Management.

"But gains will be limited since many investors want to see the impact of the problems on U.S. car sales, with more share selling ahead if there's a big drop."

Sumitomo Mitsui Financial Group, Japan's third-biggest bank by assets, rose 1.8 percent to 2,825 yen after it outshone its larger rivals and posted its biggest profit in seven quarters on Monday, helped by an improvement in its stock portfolio and a decline in bad loans.

Shares of Koito Industries plunged 33.5 percent to 159 yen after the company said it was told by Japan's Transport Ministry on Monday to improve business management over the falsification of fire resistance and strength data on plane seats.