TOKYO - The Nikkei average tumbled more than 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.

While the index later recovered a little, the early stock sell-off led the Osaka Stock Exchange to trigger a circuit-breaker and briefly halt trade in Nikkei futures.

"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.

As of 0117 GMT, the benchmark Nikkei .N225 was down 8.4 percent or 767.61 points at 8,389.88. At one stage, it hit the lowest point since May 2003.

If the fall is sustained until the end of Friday, it will surpass a 9.4 percent fall in the Nikkei earlier this week, which is the biggest fall since a 14.9 percent one-day slide during the 1987 stock market crash.

The broader Topix lost 6.2 percent to 849.48.

"Investors are scurrying to convert to cash. A lack of confidence is coupling with panic," said Takashi Ushio, head of investment strategy division at Marusan Securities.

The Dow Jones industrial average .DJI dropped 7.3 percent to 8,579.19 on Thursday, with bank and insurance stocks hammered again, as the previous day's coordinated global interest-rate cuts and myriad other official measures to unfreeze money markets did little to boost confidence in the financial sector.

Exporters took a heavy beating on the deteriorating economy overseas and a strong yen, which curbs their overseas profits when they are brought back home.

The dollar hit a six-month low of 98.50 yen as investors panicked about the sell-off in global stocks.

Electronics parts maker Kyocera Corp tumbled 11.2 percent to 5,800 yen, while Honda Motor Co skidded 7.6 percent to 2,140 yen.

Financial shares sank, with top lender Mitsubishi UFJ Financial Group losing 7 percent to 722 yen.

Nomura Holdings, Japan's biggest brokerage, declined 5.6 percent to 1,160 yen.

(Reporting by Aiko Hayashi; Additional reporting by Elaine Lies; Editing by Rodney Joyce)