Tokyo stocks lost ground Thursday following two straight days of gains, with the benchmark Nikkei stock index falling 0.74 percent as a shrinking German economy sparked fresh concerns about the debt-plagued eurozone.

Brokers here said that news that Germany, Europe's largest economy, shrank in the last quarter despite posting a 3 percent growth for the year, spooked global markets, already rattled ahead of key bond auctions in Italy and Spain later in the day.

According to Germany's Federal Statistics Office, the German economy likely contracted by 0.25 percent in the last quarter of 2011 leading economists to surmise that the most important economy in Europe may be on the edge of recession with the implications of this for the broader eurozone region also contributing to a circumspect market mood Thursday.

"Europe's economy probably contracted last quarter and will keep shrinking this quarter and a strong yen is also weighing on Japan's stocks, especially export-related shares," said Takeru Ogihara, chief strategist in Tokyo at Mizuho Trust & Banking Co.

Strategists here also said that investors were eyeing Spain's debt auction of 5 billion euros later in the day and Italy's of up to 4.75 billion euros. In addition a European Central Bank policy meeting later in the day also sent some investors to the sidelines to wait and see if the bank opts to increase its bond purchases.

The 225-issue Nikkei Stock Average lost 62.29 points from Wednesday to finish at 8,385.59, while the broader Topix index of all First Section issues on the Tokyo Stock Exchange fell 6.32 points, or 0.86 percent, to end the day at 727.15.

China's inflation rate dropping 4.1 percent in December from 4. 1 percent a month earlier inspired some hope in early trade and helped lift issues related to the world's second-largest economy higher, but domestic exporters fell after the finance ministry here said Japan's current account surplus fell 85.5 percent in November from a year earlier, marking the ninth straight month of decline.