TOKYO, SEPT. 26 -- The once highflying Tokyo stock market plunged again today as fears over the Persian Gulf situation caused share prices to sink to their lowest level since early 1988.

The Nikkei stock index fell 1,108.70 points -- or 4.75 percent -- in what analysts described as panic selling by individual investors. The 225-share index closed at 22,250.62, the lowest since Jan. 5, 1988, when it stood at 21,575.28. Trading volume was moderate and big institutional investors were apparently not involved in the selling. But the drop was a dramatic reminder of the worrisome slide in Japanese stocks that has seen the Nikkei index lose nearly 43 percent of its value since the beginning of this year. Of that loss, about 28 percent has occurred since the Iraqi invasion of Kuwait.

The market continued its decline on thin volume in trading Thursday with the Nikkei losing another 1 percent of its value to close the morning session at 22,027.87. At one point, the market had dived over 700 points, or more than 3 percent, before rebounding. Traders blamed the drop on new Iraqui threats combined with higher oil prices and the decline in New York stocks.

The market's woes have stirred concerns that the Japanese economy, which has weathered the Persian Gulf storm so far, may grind to a halt in coming months because Japan's banks are suffering severe losses on their stock holdings.

The losses are likely to force the banks to curtail their lending activity, many analysts fear, especially in light of the fact that the banks are already struggling to meet new international standards of financial soundness.

In the United States, the Tokyo market's fall also has intensified fears that the flow of Japanese investment funds -- which has buoyed the U.S. economy during its current expansion -- may dry up.

Economists worry that big Japanese insurance companies and banks, which have already begun selling some of their U.S. stocks and bonds, may dump even more if they find they must cover losses they are suffering in their home country.

Behind the most recent deterioration in the market is concern over the mounting prospect of war in the Persian Gulf. Japan is almost totally dependent on imports to meet its oil needs, and about 70 percent of its oil comes from the Middle East.

The relatively modest amount of selling pressure today -- volume was about 350 million shares, up from 230 million the previous day -- led some analysts to speculate that the market could turn up again, at least temporarily. The Nihon Keizai Shimbun, Japan's national business newspaper, noted that "a rebound is not unusual following such a fast drop" in share prices. But the newspaper also said that "there is still selling pressure in the psychologically chilled market."