Tokyo stocks closed lower Tuesday, with the benchmark Nikkei stock index losing 1.27 percent on investor caution over Italy's political situation and Olympus Corp 's. admission that it covered up massive losses compounded a pessimistic market mood.

Tokyo-based brokers said that sentiment turned sour on Tuesday following the revelation that imaging and life science firm Olympus inflated payments to advisors during four of the firm's acquisitions and wrote down deals to conceal massive losses the firm incurred during the 1990s.

President Shuichi Takayama said at a news conference earlier on Tuesday that among three senior Olympus executives involved in concealing the firm's losses, former Olympus Chairman Tsuyoshi Kikukawa was culpable, as was Executive Vice President Hisashi Mori, who was dismissed on Tuesday.

The firm's auditor Hideo Yamada was also involved, Takayama said, adding that legal action may well be taken against all three individuals. Yamada has since offered to step down to take responsibility for his involvement.

"I deeply apologize for shareholders, investors, business partners, customers and those concerned for causing troubles," Takayama told the press.

"I will consider filing criminal complaints if necessary," Takayama added.

As of Monday, Olympus had lost more than half of its market value since CEO Michael C. Woodford was unceremoniously dismissed on Oct. 14 and analysts here said that investors were concerned that other Japanese firms may also be concealing losses through illicit payments and coverups.

The 225-issue Nikkei Stock Average subsequently lost 111.58 points from Monday to close at 8,655.51, while the broader Topix index of all First Section issues on the Tokyo Stock Exchange relinquished 12.42 points, or 1.66 percent, to end the day at 738. 03.

While scandal-tainted Olympus tumbled 29 percent and by its daily limit to a 16-year low of 734 yen, after its admission of financial and business improprieties to do with acquisitions and mergers, some euro-linked shares like Sony and Panasonic retreated on fears Italian Prime Minister Silvio Berlusconi may be unable to secure a majority in parliament as he faces mounting calls for him to step down.

Analysts said here that a political vacuum in Italy could mean that new austerity measures can't be implemented in the short-term to help stave of a Greece-like debt default and a recent surge in Italy's bond yield has rattled global markets as the situation in the debt-plagued eurozone intensifies.

"The surge in Italy's bond yield, spurred by the uncertain outlook for its fiscal reforms, capped stocks' upside," said Yutaka Miura, senior technical analyst at Mizuho Securities Co.

Securities-related issues lost ground on eurozone concerns and Nomura Holdings Inc. tumbled 15 percent to 245 yen, marking the firm's biggest decline in more than two years. Daiwa Securities Group Inc., for its part, dropped 7 percent to 251 yen.

Other euro-linked issues came under pressure with consumer electronics firms Sony Corp. and Panasonic Corp. losing 4.1 percent and 3.3 percent to 1,346 yen and 702 yen respectively.

Toyota Motor Corp. skidded down 1.7 percent to 2,503 yen, ahead of scrapping its full-year earnings forecast today, saying it needs more time to assess the impact flooding in Thailand has had on its business.

For the April-September first half of the year Toyota said on Tuesday that its net profit had slumped 71.8 percent from a year earlier to 81.58 billion yen (1.04 billion U.S. dollars), due to the affects of the March 11 earthquake and a persistently strong yen.

The world's largest automaker also said that it logged an operating loss of 32.57 billion yen (417.4 million U.S. dollars), 17.2 percent less than booked a year earlier, on sales totaling 8. 02 trillion yen (102.8 billion U.S. dollars).

Trading volume on Tuesday increased to 1.84 billion shares on the Tokyo Exchange's First Section, up from Monday's volume of 1. 45 billion shares, with declining issues outnumbering advancing ones by 1,429 to 182.