The 225-issue Nikkei average shed 44.56 points to end the morning session at 12,807.13. On Wednesday, the key market gauge dropped 13.36 points.

The TOPIX index of all first-section issues was off 3.88 points at 1,229.49, after losing 2.17 points the previous day.

"Lingering worries about U.S. credit problems are serving as a major drag on the market," Toshihiko Matsuno, deputy equity general manager at SMBC Friend Securities Co., said, explaining that such worries wiped out the positive effects of Wall Street's overnight gains.

Market participants dread the increasing likelihood of a U.S. government bailout of mortgage financiers Fannie Mae and Freddie Mac as well as the prospect of further losses from mortgage-related investments at U.S. financial institutions, Matsuno said.

The dollar's drop and rebounding prices of crude oil and other commodity products put an additional damper on investor sentiment, brokers said.

Tokyo stocks initially gained ground but soon faltered into negative territory since players avoided financial issues as well as export-related names.(MORE)Tokyo Stocks Move Down in Morning on Financial Jitters

Losers led gainers 1,083 to 458 on the TSE's first section in the morning, while 149 issues were unchanged.

Half-day volume came to 748 million shares.

Tsuyoshi Segawa, equity strategist at Shinko Securities Co., said that more and more domestic individual investors are opting to shed their shareholdings not only due to the Japanese economy's dimming outlook but also because of the planned securities tax reform next January.

Although the government is believed to be considering a new type of tax breaks to mitigate the impact of tax rate changes, Segawa said that investors are being discouraged by the new requirement to file for income tax returns if their capital gains exceed a certain level, whereas tax is currently withheld from income at source.

The coming tax change, coupled with the need to deposit share certificates into an electronic system to be introduced also in January, appear to be causing investors to cash out at least for the time being, Segawa said.

Japan's trade statistics released before the opening bell, meanwhile, gave clear evidence of falling demand for Japanese goods in the U.S. market, as Japan's trade surplus with the United States in July slumped 19.0 pct from a year earlier. The result stoked worries about earnings at export-reliant firms, brokers said.(MORE)Tokyo Stocks Move Down in Morning on Financial Jitters

Toyota sagged on a report by the Nikkei business daily that the top Japanese automaker may cut its vehicle sales target for 2009.

Brokerage houses such as Nomura and Daiwa suffered losses.

Trading houses, by contrast, romped ahead following commodity prices' rises. Major gainers were Mitsubishi and Mitsui.

Nippon Denko went limit-up after the metal and chemical products maker on Wednesday reported hefty profit growth for the January- June first half.END

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