Losses were felt most in Tokyo, where Japanese political turmoil added to the mix, with questions being raised about the chances of Sanae Takaishi becoming the country's first woman prime minister.
Markets have been whipsawed in recent days after Donald Trump on Friday lashed out at Beijing over its curbs on rare earths, fanning fears he will reignite their trade war following a months-long truce.
Traders breathed a sigh of relief Sunday, though, when he shifted his tone by insisting in a social media post that "it will all be fine", and adding that he wanted to "help" China.
That was enough for US dealers to return to the market at the start of this week, with all three main indexes on Wall Street rallying.
Asia's losses were limited Monday, but after a healthy start Tuesday markets sank again after China sanctioned five US subsidiaries of South Korea's Hanwha Ocean, accusing them of supporting a Washington probe into the shipping industry.
The United States earlier this year carried out a "Section 301" investigation that found Beijing's dominance in the industry was unreasonable and imposed port fees, sparking tit-for-tat measures by China.
The commerce ministry in Beijing said Tuesday in a statement: "The United States' investigation and subsequent measures "severely damage the legitimate rights and interests of Chinese enterprises."
The subsidiaries "assisted and supported the relevant investigation activities of the US government, endangering China's sovereignty, security and development interests", it said.
Markets across Asia tumbled, with Hong Kong off almost two percent, while Shanghai, Singapore, Seoul, Wellington, Taipei, Mumbai, Bangkok and Jakarta also retreated.
Shares in Hanwha dropped more than five percent in Seoul.
The selling also came amid growing concerns that the AI-fuelled rally in stocks this year -- which has helped push several markets and companies to record highs -- may have been overdone and a bubble is forming.
"Given the recent rally, positioning was stretched (and) any bad news is a cue to sell risk...which indicates the market is looking for an excuse for a selloff," said Neil Wilson of Saxo markets.
"The extent of the selling could be the cue for the last bears to throw in the towel."
Tokyo dived three percent at one point as investors returned from a long weekend also focusing on political uncertainty in Japan, where the ruling coalition collapsed Friday as junior partner Komeito quit the alliance.
The move imperilled Takaichi's chances of becoming premier, having been elected the ruling party's leader this month. Stocks had surged after her election on hopes she will unveil fresh stimulus measures and push for looser monetary policies.
It was reported at the weekend that Komeito will seek to support a unified candidate with other groups in a bid to stop Takaichi -- who needs approval from parliament -- from becoming premier.
In commodities trade, gold and silver sank soon after they both touched records.
Silver had earlier in the day struck a peak of $52.90 as investors sought other safe havens as gold continued to hit new highs, at point reaching $4,179.70.
Oil was also sharply lower on renewed worries about a revival of the China-US trade war.
- Key figures at around 0715 GMT -
Tokyo - Nikkei 225: DOWN 2.6 percent at 46,847.32 (close)
Hong Kong - Hang Seng Index: DOWN 1.8 percent at 25,429.61
Shanghai - Composite: DOWN 0.6 percent at 3,865.23 (close)
London - FTSE 100: DOWN 0.4 percent at 9,403.54
Euro/dollar: DOWN at $1.1567 from $1.1568 on Monday
Pound/dollar: DOWN at $1.3275 from $1.3332
Dollar/yen: DOWN at 151.91 yen from 152.31 yen
Euro/pound: UP at 87.15 pence from 86.77 pence
West Texas Intermediate: DOWN 1.0 percent at $58.89 per barrel
Brent North Sea Crude: DOWN 1.0 percent at $62.69 per barrel
New York - Dow: UP 1.3 percent at 46,067.58 (close)
dan/fox
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