Japan's Nikkei share average held at a six-week low on Tuesday, although improved China data helped pare early losses triggered by fears that Spain may need a financial bailout.
Exporters were again badly hit, pushing the subindex of the country's battered electronics sector to a three-year low as the yen strengthened against the dollar and the euro as investors clipped their exposure to risk.
The Nikkei closed down 0.2 percent at 8,488.09 , and is nearing its June 4 six-month low of 8,295.63.
"The China data is a slight improvement and it's helped names like Komatsu up a bit, but it's still a very minor rebound amidst a constant stream of reasons to sell," said Yoshihiko Tabei, chief analyst at Kazaka Securities.
Construction machinery maker Komatsu Ltd added 1 percent on news that China's HSBC flash factory purchasing manager's index rose to 49.5 in July, its highest level since February but still under the 50 mark that divides expansion from contraction.
Industrial robotics maker Fanuc Corp <6954.T>, which also has high exposure to China, advanced 0.7 percent.
Although modest, their gains still beat many other large caps as sentiment remained bleak and buying was mostly limited to short-covering, traders said.
"Every time the markets rally it's hard to understand why when nothing has really changed (in Europe)," said a partner at a foreign hedge fund. "I think people are either very short or have no exposure, and if the markets rally and you lose money on the downside you look even worse, which keeps dragging people into the market."
Global markets were roiled on Monday as Spanish bond yields soared to euro-era highs on worries that more Spanish regions may need financial aid after Valencia requested help last week.
Despite signs that the market might be oversold in the near-term, traders said exporters and large caps still had room to sink further if the euro zone's debt problems continue to deepen.
"Look at a name like Canon. It's trading in line with the euro and the euro keeps weakening, even though it's a good business with good cash flow," the hedge fund partner said.
Canon Inc fell 1.5 percent to hit a 3-1/2 year low as the euro dropped to 94.82 yen.
Consumer electronics firm Sharp limped 1.7 percent down to a 34-year closing low after the Nikkei business daily reported the firm was likely to have suffered a 100 billion yen loss in the April-June quarter as its LCD and solar businesses continued to decline.
That is much higher than the market consensus of around 76 billion yen.
Toshiba Corp <6502.T> sank 5.4 percent to a three-year low after saying it would cut production of its NAND flash memory chips by 30 percent after a glut in supply drove prices to new lows.
Analysts estimate around half of Toshiba's chips end up in iPhones made by Apple
"I don't rule out the possibility of a technical rebound on short-covering but apart from that I can't see any buyers," said Yasuo Sakuma, portfolio manager at Bayview Asset Management.
A likely beneficiary of short-covering on Tuesday was All Nippon Airways Co Ltd <9202.T>, which recovered 3.3 percent after hitting a 36-year low on Monday, having lost 19.2 percent since July 3, when the airline announced a secondary offering.
The broader Topix index closed 0.4 percent lower at 717.67, and has now fallen in 12 of the past 13 sessions.
Short-selling
Tokyo Stock Exchange data showed short-selling accounted for 32.7 percent of the total sales on Monday, a level market players say usually signals excessive selling and a chance of rebound.
But some analysts warn against expecting too much of a technical reversal.
"Normally (a high level of short-selling) is a good signal for a rebound. But we are in a world where German bond yields are constantly negative as investors fear Spain could impose hair-cuts on its debt like Greece. The normal rules don't apply," said Norihiro Fujito, senior strategist at Mitsubishi UFJ Morgan Stanley Securities.
"Europe needs to deal with the crisis but (German Chancellor) Angela Merkel is on holiday and so are many other policymakers. I'm worried that politics cannot keep up with market moves during the summer," Fujito added.
