A semiconductor device has a semiconductor die mounted to a carrier. A first encapsulant is deposited over the semiconductor die and carrier. A stiffening support member can be disposed over the carrier around the semiconductor die. A plurality of channels or recesses is formed in the first encapsulant. The recesses can be formed by removing a portion of the first encapsulant. Alternatively, the recesses are formed in a chase mold having a plurality of extended surfaces. A second encapsulant can be deposited into the recesses of the first encapsulant. The carrier is removed and an interconnect structure is formed over the semiconductor die and first encapsulant. The thickness of the first encapsulant provides sufficient stiffness to reduce warpage while the recesses provide stress relief during formation of the interconnect structure. A portion of the first encapsulant and recesses are removed to reduce thickness of the semiconductor device.