TOKYO (AP) _ The dollar fell sharply in Tokyo today following declines on overseas markets, and stock prices fell too.

The dollar closed at 127.80 yen, down 1.07 yen from Monday. It opened today's trading at 127.75 yen, and ranged between 127.70 yen and 127.95 yen.

On the Tokyo Stock Exchange, the 225-share Nikkei Stock Average, which fell 10.99 points Monday, lost another 150.85 points, or 0.59 percent, ending the day at 25,465.73. Volume was 800 million shares, light compared with last Friday's turnover of 1.3 billion.

Dealers said the dollar's lower opening reflected its decline Monday on overseas markets, where traders sold dollars to buy British pounds because of higher interest rates in Britain.

The U.S. currency rose slightly during Tokyo trading because of profit- taking and covering of dollar-short positions by traders, they added.

''A lack of follow-up selling from corporate players including Japanese exporters is prompting traders to cover short positions,'' said Masaharu Takenaka, a senior currency trader for the Bank of Tokyo.

The weaker dollar dragged down prices on the stock exchange, where traders stayed on the sidelines waiting for a market adjustment following recent sharp gains.

''The market is clearly very tired,'' said Ron Napier, a vice president at Salomon Brothers. He said rising interest rates also have dampened buying sentiment in Tokyo. ''We've seen a very dull market, and that's the way it's going to be for a while,'' he said.