TOKYO, April 19 (Reuters) - Japan's Nikkei share average posted its worst day in more than two and half years on Friday 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 2.66% to close at 37,068.35 in its sharpest daily fall since September 2022, with 206 out of 225 stocks declining.

The index fell to as low as 36,733.06 earlier in the session, its lowest since Feb. 8. For the week, it lost 6.2% in its biggest fall since June 2022.

"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.

Israel launched an attack on Iranian soil on Friday, sources told Reuters, in the latest tit-for-tat exchange between the two countries, stoking caution among investors.

Taipei-listed shares of TSMC fell nearly 7% following the company's first-quarter earnings report in which it dialled back its expectations for chip sector growth and did not revise up its capital spending plans.

Chip-making equipment maker Tokyo Electron tanked 8.74% and was the biggest drag on the Nikkei. Chip-testing equipment maker Advantest lost 4.38%.

"TSMC's earnings beat market expectations, but its outlook for the industry was dim," said Naoki Fujiwara, senior fund manager, Shinkin Asset Management.

All but three of the Tokyo Stock Exchange's industry sub-indexes fell. Energy explorer rose 1.07% as oil prices jumped. Shipping firms rose 0.98%.

The broader Topix closed 1.91% lower at 2,626.32, recovering some earlier losses. (Reporting by Junko Fujita; Editing by Sherry Jacob-Phillips and Varun H K)