The Nikkei average fell 0.4 per cent today, led lower by blue-chip exporters like Canon on concerns about the global economic outlook and a stronger yen.
A fall in oil prices dented energy shares including oil and gas explorer Inpex Holdings and trading house Mitsubishi.
But banks including industry leader Mitsubishi UFJ Financial Group climbed ahead of Lehman Brothers' release of its strategy plans and quarterly results later in the day.
"The market was held down by continued worries about the global economic outlook, and there are also concerns about the financial industry (other than Lehman), including AIG", said Kazutaka Oshima, chief strategist at Rakuten Securities.
He was referring to American International Group, the world's biggest insurer, which also has substantial exposure to the mortgage market. The benchmark Nikkei average ended down 54.02 points at 12,346.63 after falling as much as 1.9 per cent earlier.
The broader Topix which is heavily influenced by large-cap stocks like banks, rose 0.1 per cent to 1,192.38. The market's attention was focused on Lehman after the US investment bank's shares plunged more than 45 per cent to a decade low on funding worries.
Japanese bank shares rose ahead of Lehman's announcement in what market participants said was unwinding of short positions - bets that bank shares would fall - as some feared a repeat of the huge rally in financial stocks on Monday after the US government took over troubled mortgage finance companies Fannie Mae and Freddie Mac.
Mitsubishi UFJ rose 3.2 per cent to 867 yen and No.2 bank Mizuho Financial Group climbed 2.8 per cent to 470,000 yen.
"There is no telling what will come from the Lehman announcement. Some may be preparing for good news as such expectations were raised by the fact that the bank brought its timing forward," said Yukio Takahashi, market analyst at Shinko Securities.
South Korean news agency Yonhap reported in the afternoon that state-run Korea Development Bank was seeking a controlling stake in Lehman Brothers for about $6 billion. Yonhap cited a high ranking KDB official.