Nikkei dives 10.6 pct, eyes biggest fall since 1987

*Nikkei down 10.6 pct

*Nikkei eyes biggest 1-day drop since '87 crash

*Exporters hit by firm yen, global recession worries

*Yamato Life's bankruptcy filing spooks investors (Adds stocks, details)

By Aiko Hayashi

TOKYO, Oct 10 (Reuters) - The Nikkei average tumbled 11 percent on Friday, leaving it facing its biggest one-day drop since the 1987 stock market crash on fears the financial crisis will lead to a global recession.

The early stock sell-off led the Osaka Stock Exchange to trigger a circuit-breaker and briefly halt trade in Nikkei futures.

A bankruptcy filing by unlisted Yamato Life Insurance shocked the market, given that Japan's financial institutions had appeared to be relatively resilient to the credit crisis tearing through the United States and Europe, analysts said. [ID:nTKB003055]

"No one is buying. Fundamentals don't matter any more and there's no explanation for such a plunge," said Yoshinori Nagano, chief strategist at Daiwa Asset Management.

"Fears about the U.S. financial system have been rekindled. The U.S. government is still debating whether it would inject money into financial institutions. It needs to act now even if that would be beyond the current law."

The U.S. Treasury Department plans to start directly injecting capital in U.S. banks as soon as the end of October in exchange for passive investment stakes, according to a financial policy source familiar with Treasury Secretary Henry Paulson's thinking. [ID:nN09535775]

"On top of a tumble in U.S. stocks, we have domestic credit fears today. The news about Yamato Life came as rather a surprise and that is fuelling more fear," said Tsuyoshi Segawa, equity strategist at Shinko Securities.

New City Residence Investment Corp 8965.T has also filed for court protection from creditors, the first Japanese real estate investment trust to fail as fallout from the credit crunch spreads. [ID:nT137740]

The benchmark Nikkei .N225 sank 10.6 percent or 974.12 points to finish the morning session at 8,183.37. At one stage, it hit the lowest point since May 2003.

If it finishes at this level, it will surpass a 9.4 percent fall in the Nikkei earlier this week, which was the biggest fall since a 14.9 percent one-day slide during the 1987 stock market crash.

The broader Topix lost 8.3 percent to 829.91.