TOKYO (AFP) -- Asian stocks fell sharply Monday, dragged down by heavy losses on Wall Street after a surprise drop in U.S. payrolls sparked fears the world's largest economy may be heading for recession, dealers said.

Investors are now pinning their hopes on a Federal Reserve interest rate cut to shield the economy from the fallout from the U.S. housing slump, they added.
Asian stocks suffered a heavy sell-off after U.S. and European markets were rattled by news that the U.S. economy lost 4,000 payroll jobs in August, the first decline in four years and far below market expectations.
""U.S. employment has been growing for the past four years so the fall was pretty scary,"" said Hirokazu Fujiki, equity strategist at Okasan Securities.
""At the same time what is supporting stocks is expectations for a cut to the Fed funds rate on September 18. Investors are waiting ahead of developments in the United States. That's why there wasn't a shock sell-off,"" he added.
The Dow Jones index lost 1.9 percent Friday after markets took fright at a drop of 4,000 in payroll jobs in the U.S. economy in August.
The report stoked fears of a U.S. recession, despite assurances from the Fed that the economy was holding to a modest growth rate and that the slump in housing had been contained, dealers said.
""The U.S. employment data reinforced investor uncertainties about the future course of the U.S. economy on top of ongoing worries about sub-prime loans,"" said Katsuhiko Hiroshige, a market analyst at Traders & Co.
Investors hope that the U.S. can avert a recession if the Fed acts swiftly and aggressively to lower borrowing costs, which could help ease the housing crisis and the credit squeeze. The federal funds rate now stands at 5.25 percent.
Adding to the jitters about the health of the global economy, Japan said its economy shrank by 0.3 percent in the three months to June from the previous quarter as firms cut spending on new factories and equipment.
Japanese share prices fell 2.11 percent in morning trade with exporter shares were particularly hard hit after the dollar slumped against the yen and other currencies on news of the U.S. job losses.
Elsewhere, Hong Kong fell 1.7 percent in early trade, Shanghai shed 0.46 percent, Seoul gave up 2.6 percent, Manila declined 1.6 percent while Kuala Lumpur and Jakarta both slid 1.4 percent.
In Hong Kong most shares ""were under selling pressure after Wall Street's sharp falls last Friday and on concerns over the health of the U.S. economy,"" said Kitty Chan, director at Celestial Asia Securities Holdings.
She noted that aside from Wall Street's falls and concerns over the U.S. economy, other external factors were also weighing on the local market.
Shares were also pressured by ""fears that Chinese authorities might take additional tightening measures to cool down the economy, following last week's increase in the reserve ratio requirements of banks,"" Chan said.
Investors were also concerned that a spike in the Japanese currency could prompt hedge funds to withdraw money from equity markets as they seek to settle yen-denominated loans, dealers said.
The dollar fell below 113 yen for the first time in about three weeks, dropping to 112.75 in Tokyo morning trade, down from 113.47 in New York late on Friday when the weak U.S. jobs data had sent the greenback skidding lower