They said that the dollar's slump to near three-month lows against the yen highlighted an unwinding of so-called yen carry trades by speculators who have binged on Japan's cheap credit to fund investments elsewhere.

Investors in the region were keeping a close watch on the opening of the Chinese parliament's annual full session for any fresh initiatives to try to rebalance the nation's fast-growing economy.

But dealers said a speech by Premier Wen Jiabao, who set a national economic growth target for 2007 of about eight per cent, failed to provide fresh trading leads, leaving the Shanghai Composite Index to end down 1.63 per cent.

The Tokyo stock market extended its losing streak to a fifth trading day, closing down 3.34 per cent at the lowest level for over two months on concerns about the health of global markets and a stronger yen, dealers said.

"The current selloff is panicky although investors are relatively calm. But if this selloff continues -- and probably it will -- we may see the market panic," said Fumiyuki Nakanishi, strategist at SMBC Friend Securities.

"We are not seeing any signs that the current plunge will stop. In the coming few days, I expect further selling," he said.

European stock markets fell sharply in early trading, with London down by 1.49 per cent, Paris falling 1.84 per cent and Frankfurt dropping 1.40 per cent.

Analysts say that no one really knows the true size of the yen carry trade, but there are fears of a severe fallout if the credit bubble bursts.

They said that the Bank of Japan's interest rate rise last month to 0.5 per cent, which was the first since last July, made the carry trade less profitable although Japanese interest rates are still very low.

"The unwinding of the yen carry trade will only stop if stability returns to global markets," said Masaki Fukui, senior economist at Mizuho Corporate Bank.

Markets around the Asia-Pacific region started the week with fresh losses after the selloff continued on Wall Street on Friday.

Shares closed down 2.29 per cent in Sydney and dropped by 4.54 per cent in Manila, by 4.0 per cent in Hong Kong, by 2.71 per cent in Seoul, and by 3.74 per cent in Taipei.

Kuala Lumpur was down about six per cent in late trade while Jakarta gave up about three per cent.

"It was to be expected given the sharp falls we've seen in the US on Friday and falling prices for gold, oil and base metals," said Craig James, chief equities economist with CommSec in Australia.

"We still don't believe that there's anything for investors to get too worried about. Nothing fundamental has changed. China's economy is still strong, so is the US and as share prices continue to fall it is going to unearth more and more value for investors," he added.

Last week investors in Chinese stocks endured a roller coaster ride as the key index in Shanghai recorded its sharpest single-day decline in 10 years amid fears the government would slap capital gains taxes on securities investments.

In Tokyo, Mitsubishi UFJ Securities chief analyst Norihiro Fujito sounded downbeat about the near-term outlook for stocks.

"A short-term bottom is not in sight right now as shares are still on course for a further decline," he said.

Agence France-Presse