But market indices started to claw back morning losses in the early afternoon. Seoul's KOSPI index moved sharply into positive territory. Australian shares lost ground after Thursday's record highs, closing down nearly one per cent. Taiwan shares closed at a near three-year closing low.

Malaysian stocks were hit by confusion over a 30 per cent levy announced on Thursday on foreign portfolio capital leaving the country. Singapore shares were also sharply down at midday. "Chip makers fell following the Nasdaq's downturn and this dampened overall sentiment," said Masatoshi Sato, a manager at Kankaku Securities in Tokyo.

On Thursday, the Nasdaq index slumped 3.3 per cent and registered its third-largest point drop ever -- 83.34 points. The slump pushed down shares in Japanese semiconductor makers,including Hitachi Ltd, NEC Corp and Toshiba Corp.

The Nikkei was 1.54 per cent down in early afternoon trading, at 13,869.33. Other export-oriented stocks also slumped, hit by the yen's rising trend against the dollar. The Japanese unit was trading at around 112.1 to the dollar at 0505 GMT.

Japanese Government Bonds (JGBs) fell amid a mixed response to a proposal by members of the ruling Liberal Democratic Party for the Bank of Japan to underwrite them directly. The yield of the 203rd 10-year JGB was 2.250 per cent at midday, up from Thursday's Tokyo close of 2.190 per cent.

In Hong Kong, the Hang Seng ended the morning down 2.6 per cent, at 9,193.69. "A lot of people are preparing for the market to go down," said Ricky Tam, senior research manager at Delta Asia Securities.

But in South Korea, the key KOSPI average moved sharply into positive territory in the early afternoon after a directionless morning. It was up 0.67 per cent around 0530 GMT, at 553.85.

Australia's benchmark All Ordinaries indexclosed down 0.97 per cent. "The broader industrials are weaker after a solid day yesterday and some profit-taking. As well the Dow and the broader market were weakening in the United States," said Jamie Spiteri of Shaw Stockbroking.

Taiwan's main market index closed down 0.73 per cent at 5,474.79, a drop of 40.1 points and a 34-month low. The market, which only has a morning session, closely tracks Nasdaq.

Malaysian shares were down amid confusion over a 30 per cent levy introduced on Thursday on foreign portfolio capital leaving the country, effective from February 15. The key composite index was down 1.56 per cent at 568.34 at the midday break.

Analysts said investors were uncertain whether the calculations would be made from the actual date of investment or from the date the profit is realised. "Some prefer to wait until February 15 before doing anything," said the head of research at a foreign brokerage. Singapore's key Straits Times Industrials index was down 0.72 per cent at the midday break, at1,368.94.