(Fixes typos in lead paragraph)
* 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
By Ayai Tomisawa
TOKYO, Oct 25 (Reuters) - Japan's Nikkei closed at its lowest in nearly seven months on Thursday with chip-related stocks suffering after a rout in tech stocks inflicted the largest daily decline on Wall Street since 2011.
The Nikkei share average ended 3.7 percent down at 21,268.73, its lowest close since March 29.
The broader Topix hit a fresh one-year low, dropping 3.1 percent to 1,600.92, 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, strengthened 0.3 percent to 111.97 on the dollar.
Chip equipment makers weakened, with Tokyo Electron tumbling 4.3 percent, Advantest nose-diving 9.8 percent and Screen Holdings tanking 7 percent.
Other manufacturers also had big losses. Sony Corp declined 5.5 percent, TDK Corp shed 6 percent and Renesas Electronics Corp losty 6.9 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.
Sharp Corp dropped 9 percent after it cut its April-September sales estimate to 1.13 trillion yen from 1.30 trillion yen.
Chat app operator Line Corp fell 9.3 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 2,072 to 34. (Editing by Simon Cameron-Moore)