Nikkei Accelerates Losses to 3.7%

Japan's benchmark Nikkei index extended its correction to hit a new six-week low on Monday as worries of a slowdown in China returned to the spotlight and a sharp sell-off on Wall Street late last week curbed risk appetite.

Elsewhere, Sydney stocks ended at a ten-week low and South Korea's Kospi fell below the 2,000 mark. The Shanghai Composite however, remained resilient to hold steady at the 2,300 mark. The index was May's best performer, up 4 percent in the past 30 days compared to a 3 percent slump in the Nikkei.

On Friday, the Dow and S&P 500 posted their worst one-day drops since mid-April and led to extended profit-taking in Asia. All three major U.S. averages closed down over 1 percent as investors pulled back after recent strong gains

(Read More: Is Another Turbulent Month in Store for Markets?)

Slowdown Concerns

China's HSBC's Purchasing Manager's Index (PMI) for the month of May fell to 49.2, below the 50-mark that separates expansion from contraction The fall marked the first contraction in seven months. HSBC's survey tracks the smaller private sector firms in the country and was in stark contrast to the upbeat official PMI, released over the weekend.

"We are getting increasingly worried. Numbers have disappointed not just in China but throughout Asia Pacific over the past months," said Frederic Neumann, managing director at HSBC.

"With regard to China, we suspect that some additional stimulus would be needed, particularly if authorities impose new reforms," Neumann continued.

(Read More: Things Are Looking Bad Outside China, Too)

Nikkei Falls 3.7%

News that corporate capital spending fell 4 percent in the first quarter as firms continue to hold back investment plans highlighted the limitations of Prime Minister Shinzo Abe's stimulus policies and saw losses widen on Japan's main stock index.

Financials were the index's biggest losers with Shinsei Bank down 11 percent while Daiwa Securities and Matsui Securities fell 10 percent each.

(Read More: Will It Be Hit or Miss for Abe's Final Arrow? )

Further underpinning losses was anticipation about Abe's structural reforms, also know as the 'third arrow.' The measures may be outlined as early as this week and there is growing skepticism as to whether they will go far enough to improve economic competitiveness.

Shanghai Ends Flat

A modest rally in property developers capped heavier losses for the mainland's benchmark index after data from an independent property research agency, Soufun.com, revealed that housing prices rose for a sixth consecutive month.

China Merchants Property, Gemdale and Poly Real Estate rallied 1 percent each.

(Read More: Foreign Investors Still Barred from This, in China )

Australia Down 0.8%

Strength in banking stocks offset heavier losses from China's dismal factory data. Westpac led gains by 2 percent while Australia New Zealand Banking and National Australia Bank rose 2 percent as speculation grows for a rate cut at the central bank's policy meeting on Tuesday.

Banks have been laggards on the benchmark index in the past few weeks and the turnaround in Monday's session may finally signal a change in heart.

(Read More: Battered Aussie Stocks In for 'Winter Wonderland')

"The volumes that have exited the banks are coming to a point of exhaustion; there are plenty of investors that have been looking for 'cheap' points of entry for 12 months as the banks ran away from them. This pull-back will see a lot of retail investors jumping in," said Evan Lucas, market strategist at IG in a note.

Disappointing retail sales further supported hopes of an interest rate cut. Sales rose by a lower-than-expected 0.2 percent in May and retail stocks were hit with David Jones leading losses by 1.2 percent.

Kospi Below 2,000

Retailers were also in focus in South Korea where inflation for the month of May eased to a 14-year low. This sent shares of retailers lower with department store Daegu leading losses by 2.5 percent.

Tech exporter stocks supported the benchmark index as the stronger yen hurt the competitive edge of their Japanese rivals. LG Display rallied 1.6 percent.

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