TOKYO -- Wall Street's worries over higher interest rates spilled into Asian markets Thursday, with regional bourses heading lower as investors ran for cover. Tokyo shares fell sharply as large-cap tech shares continued to decline, after local fund managers and retail buyers failed to trim lows late in the day as they had done earlier this week.

The key

Nikkei 225

index shed 372.40 points, or 2.1%, to 17,031.63, while the


index, which includes all shares listed on the

Tokyo Stock Exchange's

first section, fell 30.31, or 1.9%, to 1606.14. The


small-cap index lost 2.75, or 3.0%, to 88.34, while the Nikkei


index shed 56.45, or 2.9%, to 1868.42.

Many investors are waiting to see when and if U.S. shares will halt their descent. Foreign investors say before plunking down any more money, they are looking for more economic data to demonstrate that Japan's economy is really recovering. Domestic mutual and pension fund managers are waiting for the earnings rush among Japanese companies to come to an end next week before stepping in to the market again.

Large tech, electronic and telecom shares were mostly lower.


(SNE) - Get Report

fell 280 yen, or 2.4%, to 11,490,


plunged 2000, or 8.9%, to 3130, while



rose 30, or 1%, to 3130 and



climbed 50, or 1.7%, to 2975.


lost 180,00, or 5.1%, to 3.35 million as investors got discouraged that the firm was not added into

Morgan Stanley Capital International's

Japan index. In Japan, MSCI, which concluded its quarterly index reshuffling overnight, only touched the small-cap index by removing

Toho Rayon




Shares of

Toyota Motor

(TM) - Get Report

jumped 410, or 8.3%, to 5340 as the auto maker reported a 3% rise in consolidated pretax profit for the year ending March 31. Experts had predicted a net loss for Toyota due to the strong yen, but the firm said strong car sales in the U.S. and Europe last year helped to maintain robust earnings.

In a bid to invite more individual investors to the market, the ruling Liberal Democratic Party said it was considering slashing the current capital gains tax on securities profits from 26% to 20%.

In listless trading, the greenback inched slightly lower to fetch 108.93 yen.

Hong Kong's

Hang Seng

index dropped 505.21 points, or 3.4%, to 14,322.60, mostly on news that real estate developer

Cheung Kong

was dropped from MSCI's Hong Kong index. MSCI said it dropped Cheung Kong, down HK$7.25, or 9.1%, to 72.50 because of the company's 50% ownership in

Hutchison Whampoa.


Including both stocks went against MSCI's policy of avoiding large cross shareholdings in its indexes, it said. Hutchison shed 0.50 to 97.25. Cheung Kong was replaced by Hong Kong's third-largest real estate developer,

Henderson Land,

which rose 8% to 30.30.

China Telecom

(CHL) - Get Report

fell 3.00, or 5.6%, to 51.00, while

Pacific Century CyberWorks

, which was added to MSCI's index, rose 1.05, or 7.3%, to 15.40.