* Nikkei, Topix both down over 10 pct from peaks
* Nikkei volatility index at highest in more than 2 yrs
* Banks and other large cap shares sold heavily
By Joshua Hunt
TOKYO, Aug 24 (Reuters) - Japanese stocks posted their biggest fall in more than two years on Monday, with the Nikkei average sinking to a 6-month low on fears of a China-led global economic slump.
The Nikkei share average dropped 4.6 percent to 18,540.68, falling below its 200-day moving average for the first time since October.
The broader Topix fell 5.9 percent to close at 1,480.87, with its turnover surpassing 4 trillion yen for the first time since March.
Both have fallen more than 10 percent from their multi-year peaks hit earlier this year.
"There's significant, ongoing disruption in Asia on the cusp of a potential end to quantitative easing and normalization of rates in the U.S...It's a bit like walking across a minefield at the moment, so people are treading carefully, as they should," said Stefan Worrall, cash equities manager at Credit Suisse.
The Nikkei volatility index, which measures market players expectations on how volatile the market will be, jumped to over 35 percent, hitting its highest level in two years.
As investors rushed to reduce their equity exposure, large, liquid stocks fell the most, with the Topix core 30 falling 6.1 percent.
Global cyclical stocks led the declines, with the transport equipment sector tumbling 6.3 percent and the electric appliance sector falling 5.9 percent.
Toyota Motor dived 6.8 percent, Honda Motor Co shed 6.5 percent, Panasonic Corp declined 5.6 percent and Hitachi fell 5.7 percent.
Financials were also battered after investors grew increasingly risk-averse, with Mitsubishi UFJ Financial Group dropping 8.3 percent, Sumitomo Mitsui Financial Group shedding 8.1 percent and Nomura Holdings falling 6.6 percent.
The index for the TSE's Mothers market for start-up firms fell 12.5 percent, to its lowest level in May 2014 as Japanese retail investors were forced to close their positions.
Still the latest sharp falls in share prices are rekindling talk that the Bank of Japan, determined to stoke inflation, may step up efforts to boost the economy.
"The sentiment on the street globally is that there's probably more upside in Japan as a regional market in terms of a short-term rebound," said Gavin Parry, managing director at Parry International Trading.
"The markets are so desensitized now to additional easing or expansions of central bank activities that they're now looking for policy initiatives as the next market catalyst. And the market in the region that we believe has the highest probability for policy initiatives, aside from China, is Japan," he added. (Reporting by Joshua Hunt; Additional reporting by Ayai Tomisawa; Editing by Eric Meijer)