The dollar rallied on a report saying Washington was considering universal tariffs on a range of goods, fanning fresh fears about a trade war.
Tokyo-listed companies linked to the artificial intelligence sector tanked for a second straight day as investors tracked a rout on Wall Street that saw Nvidia crumble 17 percent, wiping more than half-a-trillion dollars off its market capitalisation.
The retreat came after DeepSeek unveiled its R1 chatbot that has apparently shown the ability to match the capacity of US AI pace-setters for a fraction of the investments made by American companies.
Nvidia has been the standout company that has led the drive by investors to seek out all things AI, spending vast sums of cash but seeing their share prices rocket -- the US chip firm has piled on about 1,900 percent in five years.
The DeepSeek bombshell also came on the heels of President Donald Trump's announcement of a new $500 billion venture to build infrastructure for artificial intelligence in the United States.
Trump said the release "should be a wake-up call for our industries that we need to be laser-focused on competing to win".
He argued that it could be a "positive" for US tech giants.
"Instead of spending billions and billions, you'll spend less, and you'll come up with hopefully the same solution," he said.
But Sam Altman, the boss of OpenAI, which runs lead US chatbot ChatGPT, called DeepSeek "impressive".
The Nasdaq tanked more than three percent and the S&P 500 more than one percent, with another US chip-maker, Broadcom, off 17.4 percent.
The selling in Tokyo extended into Tuesday, with the Nikkei off 1.4 percent. Advantest plunged more than 11 percent, while Tokyo Electron shed 5.7 five percent and Disco Corporation almost three percent.
Tech investor SoftBank, which is a key investor in Trump's AI project, tumbled more than five percent, having lost more than eight percent the day before.
- Greenback rally -
"The Deepseek news has triggered a rethink on the AI revolution and arguably one of the pillars of the current US exceptionalism," said National Australia Bank's Rodrigo Catril.
"If R1 is as good as first impressions seem to suggest, then demand for sophisticated chips, infrastructure (think data centres) and energy may not be as large as originally thought."
Other Asian markets were mixed in limited trade ahead of the Lunar New Year break.
Hong Kong, Singapore and Mumbai rose, though Sydney, Wellington, Manila and Bangkok dipped with Sydney barely moved.
Shanghai, Jakarta, Seoul and Taipei were closed.
The dollar pushed higher after the Financial Times reported that US Treasury Secretary Scott Bessent was looking to impose universal tariffs of 2.5 percent on goods initially and lifting them by the same amount each month.
It said the move would give room for negotiations with the White House but the tariffs could go as high as 20 percent.
The report comes after Trump rattled confidence Sunday by a row with Colombia over deportations, in which the president said he would hit the country with 25 percent levies.
Bogota backed down after a short standoff, but analysts said the development highlighted the president's willingness to weaponise tariffs.
The greenback rallied against the yen, euro and sterling, while the Mexican peso and South African rand were off more than one percent each.
Investors are also looking ahead to the Federal Reserve's policy meeting this week, with hopes it will offer a fresh view of its interest rate outlook in light of Trump's tariff warnings and pledges to slash taxes, immigration and regulations.
"Data points to better inflation, continued growth but the first executive orders from the president targeting immigration could see the jobs market tighten and force up wages," TipRanks analyst Neil Wilson said.
"On tariffs, things are only just getting started. Donald Trump said he would 'rather not' impose new tariffs on China. But it's hard to see things going any other way," said Wilson.
"The reality of tariffs has not been fully priced."
- Key figures around 0710 GMT -
Tokyo - Nikkei 225: DOWN 1.4 percent at 39,016.87 (close)
Hong Kong - Hang Seng Index: UP 0.1 percent at 20,225.11 (close)
Shanghai - Composite: Closed for a holiday
Euro/dollar: DOWN at $1.0437 from $1.0492 on Monday
Pound/dollar: DOWN at $1.2440 from $1.2496
Dollar/yen: UP at 155.71 yen from 154.61 yen
Euro/pound: DOWN at 83.85 pence from 83.94 pence
West Texas Intermediate: UP 0.5 percent at $73.52 per barrel
Brent North Sea Crude: UP 0.5 percent at $77.48 per barrel
New York - Dow: UP 0.7 percent at 44,713.58 (close)
London - FTSE 100: FLAT at 8,503.71 (close)
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