Japan stocks fall on Korea tensions

The headline Nikkei index of the Tokyo Stock Exchange lost 87.42 points to end at 10,216.41. The Topix index of all first section shares shed 0.51 per cent, or 4.59 points, to 898.55.

Regional sentiment was hit by news South Korea was pushing ahead with a US-backed artillery exercise, prompting an emergency session of the UN Security Council at Russia's request, brokers said.

The live-fire drill was later carried out at the South Korean island of Yeonpyeong, which North Korean forces shelled last month, killing four South Koreans, including two civilians.

A near three per cent slide in Chinese stocks due to lingering concerns about a possible interest rate hike also depressed Tokyo's buying sentiment, brokers said.

"A sharp slide in Chinese stocks, combined with caution on South Korea's firing drill spurred profit-taking in Japan," Yumi Nishimura, deputy general manager at Daiwa Securities Capital Markets told Dow Jones Newswires.

Selling pressure also grew as profit-taking set in following recent gains, with trade sluggish as foreign investors took to the sidelines ahead of Christmas holidays, brokers said.

"There is a tendency for downward corrections when the market momentum is sluggish with foreign investors away," said Kenichi Hirano, operating officer at Tachibana Securities.

Okasan Securities strategist Hideyuki Ishiguro also said: "Compared with a week ago, the investment environment is deteriorating."

High-tech exporters with exposure to the eurozone underperformed amid concerns over European sovereign debt.

TDK slid 2.25 per cent to 5,640 yen and Olympus closed down 1.55 per cent at 2,526 while Sony fell 1.1 per cent to 2,930.

Aeon ended unchanged at 1,007 yen after a newspaper said the Japanese retailer is likely to have posted a 70 per cent year-on-year increase in group operating profit for the nine months ended November 30.

Toyota lost 0.76 per cent to 3,230 yen after a news report said the automaker is anticipating a drop of more than 10 per cent in domestic car sales in 2011, due to the expiry of government subsidies.