* Nikkei extends losses in afternoon * Chinese shares' sharp drops spark economy, stability fears * China-related stocks underperform * Fed tapering still pressuring market - analyst By Ayai Tomisawa TOKYO, June 25 Japan's Nikkei share average fell 1.8 percent in choppy trade on Tuesday, erasing earlier gains, as worries about stresses in China's banking system reignited investors' fears, dragging down companies with high exposure to China. The Nikkei dropped 238.69 points to 12,824.09 by early afternoon, after rising as high as 13,234.89 earlier. Analysts say futures selling kicked in after Chinese shares sank deeper into bear market territory, extending their sharp declines from the previous day. The Shanghai Composite Index was down 3.8 percent after diving 5.2 percent on the previous day, while the Hang Seng Index dropped 1.4 percent after falling 2.2 percent. "Investors started worrying about how U.S. and European markets would react to drops in China, and they rushed to sell," said Naoki Fujiwara, a fund manager at Shinkin Asset Management. Manufacturers with high exposure to China were under pressure, with Komatsu Ltd falling 4.3 percent, Hitachi Construction Machinery Co tumbling 3.4 percent and Nissan Motor Co dropping 1.7 percent. A recent spike in inter-bank borrowing costs have raised fears that strains in China's banking system could weigh on already slowing growth, roiling global markets which are already grappling with the Fed's plan to scale back its stimulus. Some of the exporters had gained earlier as the dollar traded above 98 yen. Sony Corp was down 0.6 percent, Toyota Motor Corp dropped 1.7 percent and Toshiba Corp shed 1.9 percent. The benchmark Nikkei has dropped around 20 percent since reaching a 5-1/2-year high on May 23, hurt by slowing growth in China, fears of a pullback in the Fed's stimulus and disappointment over the Japanese government's recently unveiled growth strategy. The index is still up 23 percent this year, helped by Prime Minister Shinzo Abe's sweeping fiscal and monetary expansionary policies aimed at pulling the world's third-biggest economy out of a two-decade long slump. "There are few negative factors in the domestic market, but global worries are keeping investors from taking positions," Kenichi Hirano, a strategist at Tachibana Securities said. The Topix dropped 1.9 percent to 1,069.49.