Asia Markets

Nikkei sinks over 2% to 3-week low as Abe stimulus weighs

Japanese shares fell to their lowest level in three weeks on Wednesday while ongoing fears about a U.S. budget battle kept trade subdued in the rest of Asia.

Japan's Nikkei shed over 2 percent while Australia's and South Korea's Kospi posted modest gains. Emerging markets outperformed with the Philippine benchmark index up 3 percent and the Jakarta Composite 1 percent higher.

"The standstill in Washington is is a great opportunity for [emerging] Asian markets, depending on how long the shutdown is. If the shutdown is long-term, there could be movement of capital back into Asia," said Jalil Rasheed, investment director at investment management firm Invesco.

(Read more: Ex-Treasury official: Stalemate could trigger US recession)

Global markets started the third quarter mostly higher on Tuesday as investors shrugged off the first partial U.S. government shutdown since 1996. Analysts warned the October 17 debt ceiling deadline poses a bigger risk for financial markets. If the federal borrowing limit is not increased by that time, the U.S. could default on its debt.

Forget debt ceiling, real threat is growth
Forget debt ceiling, real threat is growth

Investors are also watching the European Central Bank (ECB) ahead of its Governing Council meeting later in the day. There is some focus on whether the ECB will hint at the need for further long-term refinancing operations (LTRO) to help support the economy.

Nikkei skids 2%

A combination of a strong yen and disappointment with the lack of details on Prime Minister Shinzo Abe's economic stimulus package led to an afternoon sell-off in Japan as the index closed its lowest levels since September 6.

Following the announcement of a hike in the national sales tax on Tuesday, many investors were anticipating a cut in corporate taxes but instead, Abe only called on ruling parties to begin discussing cutting rates.

(Read more: Shinzo Abe's letdown puts onus on Bank of Japan)

"The stimulus announcement probably erred to the downside of what the market was looking for and there was some disappointment with substantial progress towards structural reform. We didn't get an immediate announcement on corporate tax reform and that also disappointed some investors," said Todd Elmer, Citi currency strategist.

A stronger currency also hurt confidence. The yen strengthened to the 97.6 handle against the greenback, approaching Monday's one-month high of 97.4 per dollar.

Metal stocks led the declines with Pacific Metals lower by nearly 7 percent while Toho Zinc and Sumitomo Metal Mining fell over 4 percent each as spot gold neared a two month low and copper traded near a one-week low.

Has Japan's economy reached 'escape velocity'?
Has Japan's economy reached 'escape velocity'?

Sydney 0.2% higher

Australia's benchmark index was little changed in quiet trade as investors digested August's trade figures. The nation posted a wider-than-expected trade deficit of A$815 million, but that was still narrower than July's reading of $A1.4 billion.

Mining stocks were dealt a blow on the back of lower metals prices. Gold miners Kingsgate Consolidated and Newcrest Mining closed down nearly 4 percent while Whitehaven Coal lost 1.8 percent.

(Read more: Is Australia's rate-cutting cycle over?)

Larger losses were limited after the nation's Bureau of Resources and Energy Economics forecasted a 17 percent rise in iron ore exports for the 2013-2014 fiscal year.

Kospi flat

Steep declines in auto stocks dragged Seoul's benchmark index below the 2,000 mark. Hyundai Motor and Kia Motor slumped 2.7 and 4.5 percent respectively, after U.S auto sales for September declined in nearly two years. Hyundai Mobis fell 2.6 percent.

Index heavyweight Samsung Electronics rallied 2.6 percent before posting third-quarter results on Friday, which marks the beginning of Seoul's earnings season.

Memory chip makers tracked overnight gains in the U.S. semiconductor index. SK Hynix leading gains by 4 percent

Chinese financial markets remain shut for the week-long Golden Week holiday, while India is also closed for Mahatma Gandhi's birthday.

— By's Nyshka Chandran. Follow her on Twitter @NyshkaCNBC