The bellwether Asian index fell below the 12,500 level after losing nearly 844 points to close at 12,445.38.
The yen touched the 94 level against the dollar after declining as low as 102 last month. On Wednesday, the yen had traded at the 96 level.
A lower yen helps boost exports, critical for the recovery of Japan's export-reliant economy after years of deflation.
Concerns mounted that the U.S. Federal Reserve may taper off its quantitative easing stimulus program sooner than expected.
The Nikkei, which had topped the 15,000 mark last month, has come off about 20 percent since then and Thursday's sell-off was the second biggest point loss of 2013.
The losses were across the board, led by consumer finance, communications and securities issues, Kyodo News reported.
The Japanese government has put in place a number of stimulus measures to spur the economy, supported by aggressive monetary easing by the country's central bank.
"A risk-averse mood prevailed in the market amid concern that the Federal Reserve may begin scaling back its stimulus in early autumn or even earlier," Takero Inaizumi, strategist at Mizuho Securities Co., told Kyodo.
The U.S. stimulus measures had helped pump huge amounts of capital, which in turn helped push stock markets higher around the world. On the New York Stock Exchange Wednesday, the Dow lost 120 points.