* Nikkei down 1.0 pct, Topix off 0.7 pct * Nikkei falls below 5-day moving average * Market surprised by U.S. fiscal talks setback - analyst By Ayai Tomisawa TOKYO, Dec 21 (Reuters) - Japan's Nikkei average fell below the 10,000-mark on Friday after a Republican proposal to avert a U.S. fiscal crunch failed to get enough support, a setback that triggered selling in futures and shares of exporters. The Nikkei dropped 1.0 percent to close at 9,940.06, after having risen as high as 10,175.06 in early trade. The index fell below its 5-day moving average of 9,978.34. U.S. stock index futures fell sharply after the U.S. House of Representatives abruptly recessed following failure by the Republican leader to muster enough support for a "fiscal cliff" bill. That deepened uncertainty over prospects for averting automatic spending cuts and tax increases set to start in January. S&P 500 E-Mini stock futures plunged on the news in a matter of seconds - falling as much as 3.6 percent in a mini "flash crash" that even caused a halt in trading of one March E-Mini futures contract because of the sharp move. "Investors were startled after seeing U.S. futures heading south," said Kenichi Hirano, a strategist at Tachibana Securities, adding that they wasted no time to sell Nikkei futures. Analysts also said investors used the news as an excuse to take profits before a three-day weekend as the Nikkei has risen 14.8 percent over the last five weeks. Before the U.S. jolt, investors had been ready to chase the market higher on hopes that the U.S. fiscal talks were moving towards a resolution. "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. 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 fell to 84.02 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 on Friday fell 2.5 percent after rising 2.1 percent in early trade while Canon Inc ended 1.5 percent lower after initially rising 1.6 percent. Olympus Corp dropped as much as 2.8 percent before ending down 0.7 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 0.7 percent to 832.72 in active trade, with 3.61 billion shares changing hands, compared with last week's average daily volume of 2.29 billion shares. This week, daily average volume was 3.53 billion shares.