TOKYO, Oct 20 (Reuters) - Japan's Nikkei share average cut losses in volatile afternoon trade on Thursday after a report said China was mulling an easing of COVID-19 rules for visitors.

The Nikkei share average finished the day down 0.92% at 27,006.96. The index rose as high as 27,092.55 with about 45 minutes left to trading, following a Bloomberg report that China was considering a cut in the quarantine period for inbound tourists to seven days from 10.

Airlines rose, with ANA Holdings and Japan Airlines gaining 1.63% and 1.64%, respectively.

The broader Topix also pared losses to end 0.51% lower at 1,895.41.

The Nikkei started the afternoon session by extending a drop from the morning, as it followed Wall Street declines overnight amid simmering fears that aggressive monetary tightening by the Federal Reserve and many of its global peers could trigger a recession.

World bond markets also buckled, with U.S. 10-year Treasury yields surging to new multi-year highs, giving the U.S. dollar new momentum that carried it to a fresh 32-year high to the yen just below 150.

The upward pressure on Japanese government bond yields forced the Bank of Japan, which is alone among developed-market central banks still pursuing stimulus, to step into the market and defend its yield cap.

The psychologically key 27,000 level continues to be a focus for investors, said Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management, and the Nikkei crossed that line several times on Thursday in seeking out a direction.

"But the downside should be limited," Ichikawa said. "The earnings season will get going properly next week, so market players are likely to shift to a wait-and-see stance."

Of the Nikkei's 225 components, 171 fell, 51 rose and three closed flat.

The only winning sectors on the index were energy, which rose 0.79% amid a climb in crude oil prices, and financials, which were up 0.22% as higher long-term rates boosted the profit outlook from lending.

Basic materials was the worst-performing sector, losing 1.22%.

Communications and automotive parts supplier Fujikura led decliners with a 5.19% plunge.

Uniqlo store operator Fast Retailing was the biggest loser by index points, shedding 64 points with its 2.18% slide.

Chipmaking equipment manufacturer Tokyo Electron was another notable underperformer, dropping 2.29%. (Reporting by Kevin Buckland; Editing by Subhranshu Sahu)