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* Nikkei loses 0.59%, Topix sheds 0.4%
* China-related stocks volatile as short-sellers cover positions
TOKYO, May 14 (Reuters) - Japan's Nikkei stooped to a three-month low on Tuesday, as investor sentiment took a further hit after China defied Washington by announcing retaliatory tariffs, dragging most sectors into negative territory.
China said it would impose higher tariffs on $60 billion in U.S. goods despite President Donald Trump's warnings not to retaliate against additional tariffs on Chinese imports announced by the White House on Friday.
The Nikkei share average ended the day down 0.59% at 21,067.23 after falling to as low as 20,751.45, the lowest since mid-February.
"Investors are concerned how much damage the trade war will cause on Japan's real economy and financial market," said Shusuke Yamada, vice president and chief Japan FX strategist at Bank of America Merrill Lynch.
Automakers came under pressure. Mazda Motor slid 2% and Subaru Corp fell 2.3%.
Nissan Motor Co fell 2.95% after the Nikkei business daily reported that the automaker will likely experience its fourth straight year of decreasing profits in the financial year through March 2020.
But traders added that with signs of the market being oversold, some short-term investors were covering earlier shorts.
Komatsu Ltd, with a large exposure to China, ended up 0.55% after slumping 4% earlier. Fanuc Corp was up 0.1% after dropping 2.9% and Yaskawa Electric rose nearly 1% after sliding 4.5%.
Large telecommunication companies, considered defensive shares, gained amid the drop in the broader market. Nippon Telegraph and Telephone Corp rose 1.9% and KDDI Corp climbed 2.4%.
The broader Topix shed 0.4% to 1,534.98, after falling to a more than four-month low of 1,508.85.
Small cap markets also lost ground, with the Mothers index sliding 1.96% and the Jasdaq market shedding 0.59%. (Additional reporting by Shinichi Saoshiro; Editing by Sam Holmes)