Nikkei gains as Fed stimulus seen staying, small caps continue slide
* Market continues to monitor Chinese shares
* Mothers Market extends small-to-cap decline
TOKYO, June 27 (Reuters) - Japan's Nikkei share average rose on Thursday, bouncing back from a three-day losing streak, after U.S. stocks rose on perceptions the Federal Reserve will not scale back stimulus anytime soon. The Nikkei was up 0.5 percent at 12,899.17 after dropping 3 percent over the past three days hit by worries about a cash crunch in China and ongoing concerns about the Fed's plan to trim its massive bond buying programme. Recently battered stocks such as real estate rose, with Sumitomo Realty & Development Co gaining 3.5 percent and Mitsui Fudosan Co adding 2.8 percent. Exporters with high exposure to China, which tumbled early this week, also gained ground. Komatsu Ltd rose 3.1 percent and Hitachi Construction Machinery Co advanced 2.3 percent. U.S. stocks rose on weaker-than-expected GDP data reinforcing a view the economy is not strong enough for the Fed to begin scaling back its $85 billion a month bond buying. Analysts said the Nikkei is seeing a technical rebound and bargain hunting, but upside is capped as investors are still concerned that China is facing a liquidity crisis. The Topix added 0.8 percent to 1,077.81. "If China shares are weak today again, the Japanese market could see volatility and the Nikkei could be dragged down to around 12,800," said Kenichi Hirano, a strategist at Tachibana Securities. "The entire day's mood will depend on how Shanghai shares will perform." Weakness in small-to-mid size stocks was again apparent on Thursday, with the Mothers Market falling 6.5 percent after nosediving 12 percent on the previous day. "Retail investors are reducing their positions on companies which they had bought merely on expectations for growth," said Hideyuki Okoshi, general manager at Chibagin Securities. "The start-up market can be even more volatile than the overall market, so investors don't want to be left behind when the market is sliding." Biochemical companies, which had attracted buying recently, dropped on profit-taking. PeptiDream Inc extended its losses, dropping 19 percent after stumbling 28 percent on the previous day. DNA Chip Research Inc sank 12 percent and Chiome Bioscience dropped 18 percent. The benchmark Nikkei has dropped more than 19 percent since reaching a 5-1/2-year high on May 23, hurt by slowing growth in China, fears of a pullback in U.S. stimulus, and disappointment over the Japanese government's recently announced growth strategy. However, it is still up about 24 percent this year.