Japan's Nikkei average slipped 0.6 percent on Tuesday, erasing earlier gains as exporters fell on a stronger yen and charts remained grim, with the benchmark poised for its worst quarter since Lehman Brothers failed in 2008.

The Nikkei's MACD continued to face downward after a sustained rise, while its slow stochastic, which gives near-term signals on market trends, also appeared set to dip after flattening in oversold territory.

Market players also said trade will likely remain thin, after volume hit a four-month low on Monday, as the market awaits a series of economic indicators this week including the Bank of Japan's quarterly tankan survey of corporate sentiment on Thursday and U.S. jobs data on Friday.

The dollar fell 0.5 percent to 88.92 yen and the euro lost 0.5 percent to 109.10 as Japanese exporters repatriated profits before the second quarter ends later this week.

The current dollar level is pretty tough for the market, and when the day's falls in Shanghai stocks are added in the impact is significant, said Noritsugu Hirakawa, a strategist at Okasan Securities.

This whole situation is fanning fears about Japanese results.

Shanghai shares fell 1.8 percent, and the benchmark Nikkei is poised to book its worst quarter since October-December 2008 as European debt worries pushed investors to curb their willingness to bet on risky assets, including equities.

The Nikkei shed 49.59 points to 9,644.97, with the broader Topix slipping 0.4 percent to 857.42.

For the quarter ending Wednesday, the index has shed about 12 percent so far, compared with a 21 percent drop in the quarter that finished in December 2008, following the collapse of Lehman Brothers.

Canon Inc lost 1.3 percent to 3,440 yen and Honda Motor Co fell 0.8 percent to 2,663 yen. Tokyo Electron shed 0.6 percent to 5,050 yen.

Japan Nikkei 225 Barclays Lehman brothers