The 225-issue Nikkei Stock Average dropped 457.03 points, or 1.66 percent, from Monday to close the day at 27,131.34.
The broader Topix index of all First Section issues on the Tokyo Stock Exchange, meanwhile, lost 33.25 points, or 1.72 percent, to finish at 1,896.62.
Brokers here said that volatility on Wall Street overnight about when and how many times this year the Fed may hike its rates caused investors to ditch issues bought in the morning session, with investors offloading a range of stocks.
They added that although slim, there was a chance the Fed could announce at the conclusion of its two-day policy-setting meeting set to start later in the day, an early rate hike.
"Investors became cautious after seeing the steep falls on Wall Street last night, and they became even more sensitive to declines in U.S. futures today," Shoichi Arisawa, general manager of the investment research department at IwaiCosmo Securities, was quoted as saying.
"The market will remain like this until the FOMC (Federal Open Market Committee) is over but after tomorrow, with the earnings season kicking off, investors will start hunt for stocks with good earnings," he added.
Concerns about a hawkish outcome at the conclusion of the Fed's meeting, coupled with U.S. stock futures extending losses, the benchmark Nikkei hit its lowest intraday level since Dec. 28, 2020, falling below the 27,000 line after dropping almost 700 points.
"Although investors have somewhat priced in a hawkish move by the Fed, the market was pressured by concerns the bank may be more aggressive compared with the market consensus," Masahiro Yamaguchi, head of investment research at SMBC Trust Bank, said.
Geopolitical concerns also weighed, market strategists here said, as tensions grow between the United States and Russia over Ukraine, following the United States saying it would put its troops on "heightened alert" for a possible deployment due to escalating tensions on the Russia-Ukraine border.
By the close of play, marine transportation, service and machinery issues comprised those that declined the most and falling issues outpaced rising ones by 1,832 to 290 on the First Section, while 62 ended the day unchanged.
Technology stocks weighed on the market after their U.S. peers lost ground overnight, with Nikkei heavyweight SoftBank Group slumping 5.3 percent, while Tokyo Electron lost 2.7 percent.
Toyota Motor was a notable decliner, skidding down 1.8 percent, after announcing it would suspend production at 11 local factories due to COVID-related supply chain issues.
On the main section on Tuesday, 1,320.31 million shares changed hands, rising from Monday's volume of 1,080.96 million shares.
The turnover on the second trading day of the week came to 3,156.98 billion yen (27.73 billion U.S. dollars).
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