TOKYO, April 19 (Reuters) - Japan's Nikkei share average

dropped more than 3% on Friday to their lowest levels in more

than two months as chip-related stocks tracked losses in

Taiwanese chipmaker TSMC, while an escalation in the Middle East

turmoil also dented risk appetite.

The Nikkei fell to 36,733.06, its lowest level since

Feb. 8, before ending the morning session down 3.31% at

36,818.81. The benchmark index was on course to lose 6.8% for

the week, if losses hold.

The broader Topix lost 2.78% to 2,603.07, and was

set to post a 5.6% weekly loss.

"The Nikkei was weak as chip shares tanked after TSMC's

earnings. And the index extended losses on the news about the

Middle East turmoil," said Shuji Hosoi, senior strategist at

Daiwa Securities.

Traders maintained a cautious stance after reports of a

sharp escalation in Middle East hostilities. ABC News cited a

U.S. official in reporting Israeli missiles had hit a site in

Iran, while Iran's Fars news agency said explosions were heard

at an airport in the city of Isafahan.

Taipei-listed shares of TSMC fell around 6% on

Friday following the company's first-quarter earnings report

where it retained its capex and full-year revenue outlook and

flagged only a gradual recovery for the chip sector.

Chip-making equipment maker Tokyo Electron ( TOELF ) tanked

7.76% to become the biggest drag on the Nikkei. Chip-testing

equipment maker Advantest ( ADTTF ) fell 5.49%.

Shaes of silicon wafer maker Shin-Etsu Chemical ( SHECF )

fell 5.52%.

Uniqlo-brand store operator Fast Retailing ( FRCOF ) lost

1.47%.

"TSMC's earnings beat market expectations, but its outlook

for the industry was dim," said Naoki Fujiwara, senior fund

manager, Shinkin Asset Management.

Of the 225 components, 209 stocks fell, while 16 rose.