Nikkei drops 0.5 pct, index-heavy stocks retreat ahead of Fed verdict


* Futures, index-heavy weights drag before FOMC * BOJ tankan fails to provide support to stock market * Hedge funds' selling will likely continue until year end - analyst By Ayai Tomisawa TOKYO, Dec 16 (Reuters) - Japan's Nikkei share average dropped on Monday morning, hit by selling in futures and index-heavy stocks as investors braced for a possible start of the U.S. Federal Reserve's stimulus-tapering at its policy meeting this week.

The Nikkei shed 0.5 percent to 15,323.49 in mid-morning trade after rising 0.4 percent on Friday.

SoftBank Corp dropped 1.9 percent and was the most traded stock by turnover.

U.S. Sprint Corp, which is 80 percent owned by Softbank, is mulling a takeover of smaller rival T-Mobile US and could make a bid in the first half of 2014, according to a Wall Street Journal report.

Other index-heavy stocks like Honda Motor Co fell 1.7 percent and Tokyo Electron Ltd declined 1.3 percent.

Currency-sensitive stocks also lost ground as the dollar stepped back from a five-year high against the yen. Toyota Motor Corp shed 1.3 percent and Sony Corp fell 0.9 percent.

Against the yen, the dollar bought 103.11, having briefly hit a five-year high just shy of 104.00 on Friday.

"People are uneasy before the FOMC meeting. Instead of taking positions in cash stocks, investors are mainly trading on futures," a portfolio manager at a Japanese asset management firm said.

Stronger-than-expected U.S. data and a budget deal in Washington have brightened the outlook for the U.S. economy but are causing jitters in equity markets. The latest Thomson Reuters consensus among economists is still for the Fed to begin withdrawing stimulus in March.

On Monday, the Nikkei failed to get much support from a closely watched 'tankan' data which showed an improvement in the Japanese economy.

"The market confirmed that the economy is recovering. But when we look forward, the yen probably won't weaken sharply over the next year, so we won't be seeing big growth in company profits next year," said Norihiro Fujito, a senior investment analyst at Mitsubishi UFJ Morgan Stanley Securities.

Fujito said that the market may see a slide in the near-term before it rises in the final week of the year, a trend seen recently.

"Hedge funds have been reducing risky assets since the new development in the Volcker rule was out last week. But they will likely chase the market higher and the market may see volatility when most long-term investors are away for Christmas later this month." The Nikkei has shed 2.0 percent since Dec 10, when U.S. regulators narrowed the scope of a provision in the Volcker rule that restricts banks' ownership stake in hedge funds and private equity funds.

Still, the benchmark is up 47 percent this year, on track for its best yearly rise since 1972 thanks to Tokyo's aggressive fiscal and monetary stimulus aimed at pulling the world's third-largest economy out of two decades of stagnation.

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