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By Dominic Lau
TOKYO (Reuters) - Japan's Nikkei share average skidded 3.2 percent on Monday in an increasingly tense market after last week's turbulent trade that sent the benchmark reeling to its worst one-day loss in two years.
The Nikkei ended down 469.80 points at 14,142.65 after trading as low as 14,027.42. Monday's drop broke below the index's 25-day moving average of 14,333.11 but held above 13,990, the 61.8 percent retracement of its slide from February 2007 to October 2008.
A combinations of factors, including worries the U.S. Federal Reserve will roll back its stimulus this year and weak factor activity data from China, Japan's second-biggest export market, triggered last week's sharp selloff.
The sour mood extended to Monday.
Yasuo Sakuma, portfolio manager at Bayview Asset Management, said he expected the Nikkei to correct to as low as 13,000, 8 percent below where the benchmark closed on Monday.
"Just before the sharp decline on Thursday, I have been decreasing equity positions and increasing cash position. I cut back on equity positions further from last Thursday," Sakuma said, adding that he had raised the cash level to 15 percent from fully invested two weeks ago in his 15 billion yen long-only fund.
However, he said he had not increased his short positions in his long/short fund because he was concerned of a short squeeze following steep declines.
Automaker Toyota Motor Corp <7203.T> lost 5 percent and was the second-most traded on the main board by turnover, while Japan's top brokerage Nomura Holdings <8604.T>, which was the third-most traded, lost 3.6 percent.
The benchmark plunged 7.3 percent on Thursday, its biggest single-day percentage loss since the March 2011 earthquake and tsunami. It had another volatile session the following day, traversing a 7.1 percent range between positive and negative territory before ending up 0.9 percent.
Societe Generale said the most-trade Nikkei index stock options was a put with a strike price of 11,500 and a June expiry. The next most traded was a call at 16,000, followed by another put at 12,000.
The broader Topix <.TOPX> index sank 3.4 percent to 1,154.07 on Monday, with 3.98 billion shares changing hands, down from last week's daily average of 6.21 billion shares but slightly ahead of this years' daily average of 3.91 billion.
Nomura Securities recommended investors look for stocks with strong earnings amid the volatile market.
Among the stocks it highlighted were Suzuki Motor Corp <7269.T>, auto parts maker Denso Corp <6902.T>, watch maker Citizen Holdings <7762.T>, West Japan Railway Co <9021.T>, musical instrument maker Yamaha Corp <7951.T>, Daido Steel Co <5471.T> and electric machinery maker Fuji Electric Co <6504.T>.
Despite the market turbulence, the Nikkei has risen 36 percent this year, and is still up 14.5 percent since April 4, when the Bank of Japan announced a sweeping monetary expansion campaign to beat years of deflation and revive growth.
"The market will remain range-bound for the next one to three months," Goldman Sachs wrote in a note.
"The next major catalysts may come after the July Upper House elections, when we could see a string of evidence confirming that the economy and profits are on a solid recovery path, starting with the Q2 GDP release and Q1 FY2013/14 earnings results during late July/August."
The brokerage maintained its 12-month Nikkei target of 17,000, 20 percent above Monday's close.
(Editing by Shri Navaratnam)