Nikkei plunges 9.6 pct, biggest one-day fall since '87

*Nikkei falls 9.6 pct, biggest one-day drop since '87 crash

*Nikkei down 24 pct for week and 46 pct for year

*Growing worry about financial system feeds fears

*Yamato Life bankruptcy filing spooks investors (Adds quotes, details)

By Elaine Lies

TOKYO, Oct 10 (Reuters) - Japan's Nikkei share average plunged 9.6 percent on Friday for its biggest drop since the 1987 stock crash, wiping out $202 billion in market value on growing fears that the financial crisis will spark a global recession.

The Nikkei, which has fallen for seven straight days, lost 24 percent on the week, more than twice what it lost the week of the 1987 crash. It has lost 46 percent this year.

"This is panic. New York, the currencies -- there's nothing left for us to trust," said Takashi Ushio, head of investment strategy at Marusan Securities.

"Investors are scurrying to convert to cash. A lack of confidence is coupling with panic."

Trouble hit home with the bankruptcy filing of Yamato Life Insurance, the first failure of a Japanese financial institution due to the global credit turmoil. [ID:nT150873]

That shocked investors who had viewed Japan has relatively safe from much of the pain seen in the United States and Europe, and who were already rattled by the collapse of a domestic real estate investment trust and a fall in New York shares.

The benchmark Nikkei .N225 sank 881.06 points to 8,276.43, its lowest close since May 2003. At one point it was down more than 1,000 points.

The broader Topix shed 7.1 percent to 840.86.

"The Nikkei has lost close to 20 percent in three days alone, and it's certainly not as if economic fundamentals have worsened that much in that time period," said Hiroaki Osakabe, a fund manager at Chibagin Asset Management.

"It's basically all psychological. And it's not going to stop until fears about the financial system have been erased."

Prime Minister Taro Aso said the Nikkei tumble could hurt the wider economy, while ordinary Japanese were increasingly gloomy.