* Topix market cap falls below 600 trln yen
* Nikkei has dropped 13 pct from its recent peak
* Selling was not expected to be so steep - strategist
TOKYO, Oct 25 (Reuters) - Japan's Nikkei stumbled to the lowest level in more than six months early on Thursday after Wall Street erased its 2018 gains while a tumble by Nasdaq dragged down Japanese chip-related stocks.
The Nikkei share average plummeted 3.5 percent to 21,313.33 in midmorning trade, after falling to 21,282.14, its lowest level since early April.
The broader Topix hit a fresh one-year low, dropping 3.0 percent to 1,601.73, causing market capitalization to fall below 600 trillion yen for the first time since September 2017.
The Nikkei has dropped 13 percent from a 27-year peak of 24,448.07 touched on Oct. 2.
"We haven't thought that selling would be this steep. This sell-off makes us think the market may be set for capitulation," said Shoji Hirakawa, chief global strategist at Tokai Tokyo Research Center.
Wall Street's Wednesday rout jolted the Japanese market. Both the Dow Jones Industrial Average and the S&P 500 saw this year's gains disappear on dismal earnings forecasts, while the Nasdaq Composite plunged 4.43 percent.
The yen, seen as a safe-haven asset, strengthened 0.35 percent to 111.87 on the dollar.
Chip equipment makers were sold sharply, with Tokyo Electron tumbling 5.0 percent, Advantest nose-diving 8.7 percent and Screen Holdings tanking 6.5 percent.
Other manufacturers also had big losses. Sony Corp declined 5.1 percent, TDK Corp shed 5.5 percent and Renesas Electronics Corp 6 percent.
"Investors see that U.S. manufacturers surrender to rising material costs, higher personnel costs and slower demand due to trade war, and they worry that these factors will also hit other global companies," said Shogo Maekawa, global market strategist at JPMorgan Asset Management.
He added that earnings reports from Amazon and Alphabet Inc's due later in the day likely set the tone in the Japanese market on Friday.
"These are the companies which had let the gains in the market this year so if their results disappoint investors, the market may see a further downside," Maekawa said.
Sharp Corp nosedived 10 percent after it cut its April-September sales estimate to 1.13 trillion yen from 1.30 trillion yen.
Chat app operator Line Corp stumbled 9 percent after it posted a 6 billion yen net loss for the January-September period.
All of the Topix's 33 subsectors were in the red. Declining issues outnumbered advancers 2,066 to 32. (Editing by Richard Borsuk)