Japan's stock market has plunged to new depths, despite the government's claims that the economy is recovering.

The flagship Nikkei stock index lost 305 points - or 3.12% - to close at 9,217.04.

Market sentiment is absolutely awful right now

Masaharu Sakudo Tachibana Securities

That is its lowest close since September 1983, when it ended just one point below Tuesday's close.

Firms which export goods to the US - such as Sony and Nissan - have been suffering from new fears over the state of the US economy.

And that in turn has created more pressure on banks, which are threatened with bad debts if the flow of firms filing for bankruptcy increases.

No buyers

"Part of our weakness lies in concerns about the cloudy economic outlook in the US," said Masanori Hoshina, head of global portfolio marketing at BNP Paribas.

"But the key problem is that there are still no signs of a sustainable economic recovery in Japan."

There are also grave doubts over the ability of the Japanese economy to continue to pull itself out of a deep 15 year recession.

And new data on Tuesday showed that Japan's tentative manufacturing industry faltered in August.

"Market sentiment is absolutely awful right now," said Masaharu Sakudo, an adviser at Tachibana Securities.

"Stocks look very cheap at these levels but nobody is ready to buy yet," he said.