Nikkei falls as investors sell exporters on stalled U.S. budget talks

* Nikkei, Topix turn negative

* Market surprised by U.S. fiscal talks setback - analyst

* Olympus down 1.8 pct on Sony merger delay

TOKYO, Dec 21 (Reuters) - Japan's Nikkei average erased earlier gains and turned lower on Friday after a Republican proposal to avert with a U.S. fiscal crunch failed to get enough support, triggering selling in exporters as the yen strengthened. at 10,014.17, after having risen as high as 10,175.06 earlier. The index dipped below the 10,000-mark temporarily. U.S. S&P futures were down 1.6 percent, dragging down Nikkei futures after the U.S. House of Representatives abruptly recessed after Republicans failed to muster enough support for a "fiscal cliff" bill. This deepened uncertainty over prospects for averting automatic spending cuts and tax increases set to start in January. "The delay in resolving the U.S. fiscal cliff problem is raising concern as the market expected some sort of positive direction out of the talks by the end of the year," said Fujio Ando, a senior managing director at Chibagin Asset Management. Analysts said investors had been ready to chase the market higher on hopes that the U.S. fiscal talks were moving towards a resolution, but latest developments dented optimism. "Investors were caught off-guard. Some of them were still buying before Christmas, but others, who were looking for the timing to take profits from recent gains, decided that this news was a reason to sell," said Hikaru Sato, a senior technical analyst at Daiwa Securities, adding that the Nikkei may end below 10,000-mark on Friday before a three-day weekend. Japanese financial markets are closed on Monday for a national holiday. The yen, which has been pressured by market expectations that a new Japanese government will push the Bank of Japan into more forceful monetary easing, regained a bit of ground as risk appetites fell. The dollar eased 0.2 percent to 84.23 yen, inching away from a 20-month high of 84.62 yen struck on Wednesday. A strong yen cuts exporters' overseas earnings when repatriated. Among exporters, Toyota Motor Corp fell 1.2 percent and Canon Inc lost 0.9 percent. Olympus Corp dropped 1.8 percent after saying that a planned merger of its medical business with Sony Corp would take longer than expected due to delays in obtaining regulatory approval abroad. The broader Topix fell 0.2 percent to 837.11 in active trade, with 2.04 billion shares changing hands by the midday break, compared with last week's average daily volume of 2.29 billion shares.