A semiconductor substrate has a plurality of different size recesses formed in the substrate to provide a stepped interposer. A conductive via can be formed through the stepped interposer. An insulating layer follows a contour of the stepped interposer. A conductive layer is formed over the insulating layer following the contour of the stepped interposer. A first semiconductor die is partially disposed in a first recess and electrically connected to the conductive layer. A second semiconductor die is partially disposed in a second recess and electrically connected to the conductive layer. The first semiconductor die is electrically connected to the second semiconductor die through the conductive layer. The first and second semiconductor die can be flipchip type semiconductor die. An encapsulant is deposited over the first and second semiconductor die. A portion of the stepped interposer can be removed to reduce thickness.