Worries persist that Japan will be dragged down by problems in the US

Core private-sector machine orders - seen as a key indicator of corporate investment - were down by 4% from 2006.

The decline came after orders slipped 3.2% in December from the previous month, after a 2.8% drop in November.

The figures will add on fears Japanese firms are curtailing spending amid a US economic slowdown, and the data sent the Nikkei stock index down 1.44%.

There have been persistent concerns about whether Japan's fragile economic recovery will be able to withstand a sharp slowdown in growth in the US, its main export market.

"A slowdown in exports, which had led Japan's economy for the past five years, is now inevitable," said Naoki Murakami, senior economist at Goldman Sachs.

The Bank of Japan kept interest rates steady at 0.5% at its last meeting and some analysts are now predicting that the next move could be a cut - a dramatic change of tone from just a few months ago.

The economics minister, Hiroko Ota, said the government was keeping a keen eye on economic developments, but that orders were expected to pick up over the January to March period.

She added: "We need not be overly pessimistic about the current state of machinery orders."

The negative data hurt shares in Japan's construction equipment makers and sent the benchmark Nikkei 225 index down 1.44%, to close at 13,017.24.