Most other markets in the region kicked off the New Year on a more confident note, especially Seoul, which surged 4.5 percent.

Traders in Tokyo said that with euro trading officially beginning on Monday, concerns about currency market volatility and views that the yen may firm further against the dollar had battered stock market sentiment.

Tokyo's benchmark Nikkei average dropped 3.08 percent to close at 13,415.89.

"There are worries that the yen will rise further against the dollar in line with the birth of the euro," said Kazue Mayuzumi, deputy chief operating officer at Nikko Securities.

"The dollar's slide below 115 yen would be a big negative factor for Japan's exporters," Mayuzumi said.

The U.S. dollar dropped near a three-month low at 112.79 yen before climbing back to around 113.50/60 by late afternoon in Asia.

The euro began trade at $1.1747 at 5:00 a.m. in Sydney (1800 GMT), and rose as high as $1.1913 in early European deals. By 0930 GMT, the currency was trading around the $1.18 level.

Tokyo's weakness hit Hong Kong shares, and the Hang Seng index fell 2.38 percent to finish at 9,809.17.

Hong Kong brokers said investors were staying on the sidelines waiting for the response of European markets to the launch of the euro, which began trading smoothly in Sydney.

South Korea's composite index performed strongly and jumped 4.46 percent to close at 587.57.

Brokers said optimism about an economic turnaround had lifted the market. Players also saw hope for an extended rally after news that Moody's Investors Service may upgrade foreign currency debt ratings of Korea Electric Power Corp, they said.

Australian shares ended 0.68 percent higher at 2,832.6.

"There certainly seems to be a bit of a drive towards the stocks that provide a bit of certainty at the moment," said Steve Mayne, a dealer at Macquarie Nevitts, who noted that heavyweight shares had performed better than smaller issues.

In Singapore, the Straits Times Index closed 0.53 percent up at 1,400.11.

Electronics and property shares led the volumes as weekend news of a local bank's rate cut, and a takeover offer for Electronics Resources encouraged retail investors.

The Malaysian market, boosted in the last days of 1998 by institutional investors, dropped heavily when those institutions stood back on Monday.

Kuala Lumpur's composite index tumbled 4.18 percent to finish at 561.65.

Philippine stocks closed higher, with the 33-share composite index ending 0.61 percent up at 1,980.70.

"The good news is the peso is getting stronger," said Russel Ong, analyst at Anscor-Hagedorn Securities Inc. The peso closed trading on Monday at 38.57 to the dollar, up from a previous close at 39.09.

In Indonesia, concern over the country's political uncertainty helped send the key index down 1.01 percent to finish at 394.01.

Thousands of Indonesian troops clamped down on the rebellious province of Aceh on Monday after a weekend of violence in which security forces were reported to have shot dead nine civilians.

Thailand's composite SET index finished up 0.24 percent at 356.68.

Shares in Bombay ended off their best, although the share index was still 2.03 percent higher at a provisional 3,122.44.

Stock markets in New Zealand and Taiwan were closed on Monday. Both will resume trade on Tuesday.