Nikkei suffers biggest fall in 5 mths on fear of faraway conflicts


* Tensions in Ukraine, U.S. airstrikes in Iraq sour sentiment * Nikkei falls to 2-month low * Futures trading volume highest in 6 months * Earning disappointment hits Nikon, Nisshin Steel * Volatility index at highest since March By Hideyuki Sano TOKYO, Aug 8 (Reuters) - Japan's Nikkei share average slumped to a two-month low on Friday, suffering its biggest daily decline in five months as investors were gripped with fear that geopolitical crises in Ukraine and the Middle East could disrupt global growth.

The Tokyo Stock Exchange's all 33 sector subindexes posted losses as investors rushed to reduce exposure to risk assets, while trading volume in the Nikkei futures hit the highest level since early February.

"My whole screen is completely in red. Bad stocks are going down and good stocks are down. This is not related to fundamentals," said Stefan Worrall, director of equity cash sales at Credit Suisse in Tokyo.

The Nikkei average fell 3.0 percent, its largest daily loss in five months, to 14,778.37. It has fallen 6.2 percent from a six-month high of 15,759.66 hit just over a week ago.

Risk appetite was depressed on concerns that Russia's ban on certain food imports from the West in retaliation against the West's sanctions on Moscow could hurt an already-fragile European economy.

"Europe doesn't look good. Deflationary conditions are strengthening, raising concerns that monetary easing by the ECB may not be working. If you have geopolitical worries at a time like this, it's inevitable to see weakness in shares," said Hiroshi Ono, the head of equity investment at Sumitomo Life.

Sentiment soured further after U.S. President Barack Obama said he authorised targeted air strikes against Islamist fighters in northern Iraq to help besieged religious minorities and protect U.S. personnel in Iraq.

"Conflicts in Ukraine and the Middle East don't seem to be likely to calm down any time soon," said Hisashi Kuroda, manager of equity investment at Meiji Yasuda Asset Management.

Geopolitical uncertainties could erode the consensus view that the Japanese economy will easily recover from a slowdown caused by sales tax hike in April.

One of the biggest drags on the Nikkei was Nikon, which fell 9.4 percent, hitting a three-year low, after it cut its full year earning outlook, citing weak sales.

Other companies with soft earnings took a similarly large hit. Nisshin Steel fell 9.8 percent and Nippon Electric Glass fell 8.8 percent.

Japan Tobacco posted the biggest losses among the Topix 30 index of major companies, as its business in Russia is a core part of its overseas business.

Mixi Inc, an internet social network service that has been a recent favorite among Japanese day traders, tumbled 5.0 percent.

The market's sharp fall took many market players by surprise, who have thought expectations of more stock buying by the country's largest pension fund would limit losses.

As a result, the Nikkei volatility index spiked up to as high as 27 percent, its highest since March, almost doubling from a historic low of 14 percent hit just last month.

The broader Topix fell 2.4 percent to 1,228.26 with trading volume about one third above its average during the past several months.

Trading volume in futures shot up to 142,342 contracts, more than double the average in the past three months.

The JPX-Nikkei Index 400 also dropped 2.4 percent.

(Additional reporting by Tomo Uetake; Editing by Eric Meijer and Simon Cameron-Moore)

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