Tokyo's benchmark Nikkei average tumbled more than 4 per cent by early afternoon, its biggest drop of the year so far, as investors worried the yen's surge would strangle a fledgling economic recovery.

"If blue-chip exporters fare badly due to the strong yen, that could put the brakes on the recovery in the Japanese economy, which of course would hurt the performance of domestic demand-related companies," said Masafumi Nakayama, a strategist at Mito Securities.

Tokyo traders returned from Wednesday's public holiday to find the spry yen trading at the 104 yen level to the dollar, compared with Tuesday's Tokyo close of 106.55/58. Overnight in New York, the US currency had dipped to around 103.25 yen, its lowest in more than three-and-a-half years.

A robust yen shrinks the yen-based value of income earned in dollars abroad.

The dollar wasquoted at 104.79/84 yen as of 0330 GMT, up modestly from its morning low of 104.40 yen, supported by caution over possible joint international action to stem the yen's strength.

"Up to now, Tokyo stocks had been relatively firm despiterises in the yen," a senior dealer for a European bank said. This had allowed Japanese authorities to take a relatively relaxed stance towards the yen's ascent, but now that attitude may change, he said.

In Hong Kong, Typhoon York closed stock and futures markets, while in Australia, higher interest rate fears pushed the benchmark All Ordinaries index down about 0.9 percent to 2,912.4.