Tokyo stocks fell sharply Thursday, with the benchmark Nikkei stock index losing 1.80 percent to close at its lowest level since March 2009, as a German debt auction reignited fears about Europe's debt crisis and doused investor sentiment.

Local analysts said that concerns about the fiscal health of Europe mounted as Germany suffered a miserable debt auction for new 10-year debt. Europe's leading economic power was seeking to raise as much as 6 billion euro (8.1 billion U.S. dollars) at the auction, but succeeded in only achieving around 3.9 billion euro.

Meanwhile, borrowing costs for Italy and Spain, Europe's third and fourth largest economies, rose from already perilously high levels with conflict among major economies in the troubled region making it difficult for the European Central Bank (ECB) to intervene.

Also compounded negative sentiment on Thursday, macroeconomic data from the United States also stoked fears about a global economic slowdown, as those applying for unemployment benefit rose, consumer spending fell, orders for durable, manufactured goods dropped and business investment also declined.

Sentiment is quite bad amid concerns about the U.S. economy and Europe's worsening debt crisis. "Cash is king for investors in this kind of environment. The biggest problem in Europe is there is no strong political leadership to address the crisis," said Ayako Sera, strategist at Sumitomo Trust & Banking Co. in Tokyo.

The 225-issue Nikkei Stock Average dropped 149.56 points from Tuesday to 8,165.18, marking its lowest close since March 31, 2009, while the broader Topix index of all First Section issues on the Tokyo Stock Exchange fell 11.71 points, or 1.63 percent, to finish at 706.08. Markets were closed here on Wednesday for a national holiday.

Euro-linked issues lost ground as the yen gained against its European counterpart and game console and software maker Nintendo fell 4.3 percent to 10,860 yen, while electronic component maker Kyocera Corp. dropped 2.6 percent to 6,380 yen.

Financial issues came under pressure after Economy Minister Motohisa Furukawa said on Thursday that the eurozone debt crisis could "potentially have a direct impact on the Japanese economy, including its financial system."

This is due to Japan's banks having the third largest exposure to Italian sovereign debt. The cabinet office said that Japanese banks hold abound 30.8 billion U.S. dollars, or 11 percent, of the 288 billion U.S. dollar Italian debt.

Subsequently, Mizuho Financial Group Inc. retreated 1 percent to 99 yen and Sumitomo Mitsui Financial Group Inc. relinquished 1. 9 percent to 2,029 yen.

Nomura Holdings Inc., Japan's biggest brokerage, declined 5.5 percent to 224 yen, after a nation daily here reported that Nomura plans to axe 1,000 jobs. The Financial Times also reported the firm is in talks about potentially selling some of its local businesses.

Firms with a broad expose to markets in China lost traction on China's falling manufacturing data and earth moving equipment maker Komatsu fell 4.1 percent to 1,818 yen, while industrial robotics firm Fanuc Corp. lost 3.3 percent to 11,850 yen.

Scandal-hit Olympus Corp. ended limit-up at 1,019 yen, or 17.3 percent higher, as ousted CEO Michael Woodford is back in Japan to meet investigators and the board of directors, but said he doesn't wish the firm's stock to be delisted from the TSE.

Trading volume on Thursday fell to 1.49 billion shares on the Tokyo Exchange's First Section, down from Tuesday's volume of 1.51 billion shares, with declining issues outnumbering advancing ones by 1,315 to 238.