A man looks at his watch as he passes an electronic board displaying a graph of currency rates outside a brokerage in Tokyo.

Tokyo's benchmark index fell 0.93 percent Monday on fears over a US budget standoff and worries about the slowing Japanese economy, while a strong yen also weighed on shares.

The Nikkei 225 index at the Tokyo Stock Exchange closed down 81.16 points at 8,676.44, while the broader Topix index of all first-section shares lost 1.12 percent, or 8.16 points, to 722.58.

All eyes are on Washington where a fiscal cliff of swingeing spending cuts and tax hikes is looming - which will likely send the world's biggest economy into recession - if lawmakers cannot agree on a new deal.

“The stand-off over the fiscal cliff impasse is extending its paralysis to the stock market,” said Hiroichi Nishi, general manager of equities at SMBC Nikko Securities.

Adding to the sense of dread for the global outlook Japan on Monday released data showing its economy contracted 0.9 percent in the July-September quarter, underscoring fears that the country's post-disaster recovery has stalled.

Investors are also looking to results from Japan's major lenders later this week at the tail-end of the latest earnings season.

“The market is in a lull before the release of major banks' earnings later this week,” CLSA equity strategist Nicholas Smith told Dow Jones Newswires.

In Tokyo trade, department store group Isetan Mitsukoshi Holdings was down 3.27 percent at 709 yen after cutting its full-year outlook, while convenience store operator Seven&i Holdings lost 1.56 percent to 2,332 yen.

The yen's strength dragged down exporters, with Sony off 2.61 percent at 856 yen and Toyota down 1.75 percent at 3,085 yen.

Suzuki Motor jumped 4.49 percent to 1,835 yen after posting a sharp rise in first-half profit.

Mazda Motor rose 0.95 percent to 106 yen after news of a tie-up with Toyota to make vehicles in Mexico for the North American market.

In currency trading, the euro bought $1.2727 in Tokyo, up from $1.2709 in New York late Friday, while it fetched 101.14 yen from 100.99 yen.

The dollar was flat at 79.47 yen. - Sapa-AFP