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The yen also slid against the dollar, reversing earlier gains in a volatile morning in which dealers were cautious about being able to settle trades in thin trading conditions.

Japanese automakers, electronics firms and oil refiners saw their share prices drop as much as 12 percent after having to shutter key factories after Friday's earthquake and tsunami, which are feared to have killed more than 10,000 people and severely damaged infrastructure.

Analysts say the country's economy is likely to suffer a setback at least in the near-term, and risk modeling company AIR Worldwide has said last week's earthquake could lead to insured losses of nearly $35 billion.

"The recent major earthquake is bound to exert downward pressure on Japanese equities as a whole over the near term," analysts at Nomura said in a research note.

"Based on declines after the Kobe earthquake, we expect the TOPIX and the Nikkei average to decline and then rebound in ranges around 850-900 and 9,500-10,000, respectively," they said, referring to a 1995 earthquake that struck western Japan.

Japan's Nikkei stock futures opened down about 7 percent compared to the regular session close on Friday. After paring some losses, the most actively traded June futures contract was down 4.8 percent at 9,710.

Futures for the broader TOPIX index were down 6.2 percent and were halted because of the big gap between buy and sell orders, an indication of illiquid conditions that make pricing assets difficult.

The benchmark Nikkei index .N225 fell 4 percent to 9,843.95, with technology companies such as Kyocera Corp (6971.T) and Canon Inc (7751.T) the biggest drags on the market.

"We're seeing lots of noise, lots of funny moves. This is the market in which you have to stay sidelined for now," said Michael Kretschmer, senior portfolio manager from Pelargos Capital based in Europe. "We're not seeing any panic selling. I'm in Europe but monitoring the Nikkei closely," he said.

Worries about the possible hit to the economy and the slide in Tokyo shares gave a lift to Japanese government bonds, with the lead June 10-year JGB futures surging more than half a point to 139.77.

The yen rallied broadly in early Asia but quickly pared gains in volatile trade as nervous traders waited to see what action Japanese officials will take to keep markets calm after Friday's quake and tsunami.

A fund manager at a Japanese trust bank said that most Japanese traders were sidelined this morning because there was some uncertainty about whether trades would be settled properly with many banks lacking manpower due to disruptions to public transport.

The Bank of Japan, which holds a policy meeting on Monday, injected 7 trillion yen into the money market via a same-day operation. The central bank said the fund injection was aimed at helping smooth fund settlement.

The dollar was last up 0.5 percent compared to late U.S. trade on Friday at 82.20 yen.

The yen had risen sharply on Friday on talk of repatriation flows as the disaster unfolded.

(Additional reporting by Yoshiko Mori and Hideyuki Sano, Writing by Masayuki Kitano; Editing by Kevin Plumberg)

The massive earthquake and tsunami in Japan are estimated to have killed 10,000 people and left officials scrambling to avoid meltdowns at three nuclear reactors.

The disaster hit commodities markets hard on Friday, and brought on a flurry of short bets against Japanese stocks.

The effects on the U.S. market are harder to determine. The S&P 500 fell below its 50-day moving average last week and support appears to be waning, despite a rally on Friday.

In the short term, investors are likely to focus on the ramifications for energy companies, particularly nuclear power. Japanese officials said there may have been a partial meltdown at the No. 1 reactor of a nuclear plant in Fukushima.

"The disaster could prove to be a setback for nuclear power as an alternative energy source," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. "Whether or not we see a reaction in utilities and engineering and construction companies remains to be seen."

Ablin, however, did not foresee a notable reaction in the broader U.S. market.

Nuclear-powered countries may reexamine expansion efforts or expend more on safety and security at plants. President Barack Obama has been a supporter of an expanded nuclear energy program, but that will be called into question now.

In February, the White House asked for $36 billion in federal loan guarantees to help finance the building of nuclear power plants, as it did last year, which would double what the loan program already has in authority.

"Nuclear loses in the near term. Conventional oil, natural gas, and coal are the winners," David Kotok, chief investment officer at Cumberland Advisors in Sarasota, Florida, wrote in a Sunday commentary.

Nuclear energy stocks have received a boost following yearly budget proposals from President Obama. The Van Eck Market Vectors Nuclear Energy exchange-traded fund (NLR.P) hit a 52-week high on February 8, rising 7 percent in the two weeks after Obama's 2011 State of the Union address.

The quake triggered an increase in risk aversion, with nervous Japanese liquidating investments overseas and bringing capital back to yen-denominated assets.

The dollar fell 1.2 percent to 81.87 yen on Friday, while shares of the CurrencyShares Japanese Yen Trust (FXY.P) rose 1.3 percent to $120.62. The yen may come under pressure, however, if the reconstruction worsens the country's already-heavy debt burden.

OIL, MIDDLE EAST STILL WEIGH

Investors are also still grappling with political protests in the world's top oil exporter, Saudi Arabia.

That figure is nearly as much as the entire worldwide catastrophe loss to the global insurance industry in 2010, and could be the triggering event that forces higher prices in the insurance market after years of declines.

AIR said its loss estimate range was $14.5 billion to $34.6 billion. That was based on a range of 1.2 trillion yen to 2.8 trillion yen, converted at 81.85 yen to the dollar.

The firm cautioned the estimate was preliminary, and it has said its models do not factor in the effects of the tsunami that followed the earthquake, or any potential losses from nuclear damage.

AIR cautioned that in some cases, buildings will have been damaged by the 8.9-magnitude earthquake and then swept away by the flooding thereafter, making precise counting difficult.

There are also lingering questions about the cost of the clean-up and long-term monitoring following explosions and radiation leaks at the Fukushima nuclear reactors. Such reactors generally have insurance that excludes earthquake damage, and many Japanese homeowners have nuclear exclusions in their own policies.

That is likely to limit liability to the operator and the government and minimize impacts to the insurance industry itself.

HISTORICAL RECORD

At the upper end of the range, this temblor will go down by far as the costliest earthquake in modern history in terms of insured losses, surpassing the roughly $15 billion in losses of the 1994 Northridge earthquake in California.

Of all catastrophes since 1970, adjusted for inflation, it would rank as the second costliest behind Hurricane Katrina.

It may also be enough to stem years of price declines in the global property insurance and reinsurance markets, which are awash in excess capital following a lack of major hurricane disasters in recent times.

Going into this year, analysts and brokers said it would take a $50 billion event to stem the price declines in the market for just a year.

Since January 1, the industry has also confronted at least $10 billion in losses from an earthquake in New Zealand, still-untold losses from Australian flooding and an estimated $8 billion to $10 billion in losses from unrest in the Middle East.

Cumulatively, some like Standard & Poor's believe the losses may be enough to trigger the long-awaited "hard market" in which insurers again have pricing power.

(Additional reporting by Dave Cutler; Editing by Louise Heavens)