The Nikkei average fell below the psychologically important 31,000 level Monday, as Middle East events kept investors on edge, and a volatility gauge was driven to a one-year high.

The Nikkei fell 0.83%, closing at 30,999.55. It sunk earlier to a two-week low of 30,974.26, however it rallied in the last two minutes of trading as sellers piled back in.

Of the 225 components of the Nikkei, 175 declined, compared to 48 which increased, with two remaining flat.

A volatility index tracking the Nikkei jumped as high as 23.87, a level not seek since October 28th.

The broader Topix slid 0.75%.

Maki Sawada, a strategist at Nomura Securities said, “Concerns about a possible worsening of Middle East tensions will continue to be a weight on the Japanese stock market.” 

Analysts felt that the risks of the Israel-Hamas tensions expanding into a wider conflict were increasing as Washington warned of a significant risk to US interests in the region, and announced it would deploy additional air defense units.

On the other side, diplomatic efforts were able to allow the entry of aid convoys into Gaza, and the release of two American hostages left experts hopeful additional hostages may be released soon.

Resource shares were the worst performers on the Nikkei, as oil continued to slide back from its multi-week highs on Monday.

The biggest percentage decliner was Pacific Metals, which fell 4.83%. ENEOS, the refiner, fell 3.01%.

Among the 33 industry groups in the Tokyo Stock Exchange, losses were led by oil and coal producers, which fell by 2.79%. Mining was second, falling 2.48%, with iron and steel companies sliding 2.22%.

Shares of chip-related firms underperformed as well, following the lead of US peers, as the outlooks on so-called growth stocks were dimmed by the fact US Treasury yields were at 16-year highs.

Advantest fell 2.98% while Renesas Electronics dropped 2.69%.