TOKYO, Dec 21 (Reuters) - Japan's Nikkei share average dropped on Thursday following a sharp sell-off on Wall Street overnight, slipping from near historical highs, while automaker Toyota's shares tumbled on a widening safety inspection scandal at its unit Daihatsu Motor.

The Nikkei sagged 1.68% to 33,110.45 as of 0217 GMT. Of it 225 components, 198 declined, 26 rose and one was flat.

The broader Topix dropped 1.16%.

On Wednesday, the Nikkei had hit 33,824.06 - approaching last month's 33-year peak of 33,853.46 - after the Bank of Japan stuck to a dovish posture a day earlier, disappointing traders who had expected hints of a near-term exit from stimulus.

Japanese equities had also been riding the rally in U.S. stocks that took the Dow and Nasdaq to record highs this week, amid expectations that the Federal Reserve is close to cutting interest rates and the economy is set for a soft landing.

"This (Nikkei's decline) is a reaction to what happened in U.S. equity markets overnight," said Sumitomo Mitsui DS Asset Management chief macro strategist Masayuki Kichikawa, adding that the record Wall Street rally was "overextended".

However, with evidence building for a U.S. soft landing and Japan's own economy showing signs of robustness, "there should be more upside rather than downside for equities in Japan", including for the remainder of this year, he said.

Heavyweight Toyota declined as much as 5.6% and was last trading 4% lower, after its small car-making unit said it would halt all vehicle shipments following an independent panel's finding that collision tests had been rigged.

Toyota's slump dragged transport equipment, making it the worst performer among the Tokyo Stock Exchange's 33 industry groups.

Semiconductor-related stocks were also standout underperformers, tracking U.S. peers lower. Chipmaker Renesas Electronics was the Nikkei's biggest decliner, down 5.33%. Chip-testing equipment manufacturer Advantest slid 3.45%. (Reporting by Kevin Buckland; Editing by Rashmi Aich)