* Nikkei falls 0.7 pct, Topix down 0.3 pct * Trading remains volatile as focus turns to Fed outcome * Sony rises after hedge fund ups stake, presses spin-off By Dominic Lau TOKYO, June 18 Japan's Nikkei average reversed early gains on Tuesday, underscoring the volatility that has roiled the market lately, as investors awaited the outcome of a Federal Reserve meeting for clues on whether it will continue to support the U.S. economy. By the midday break, the Nikkei slipped 0.7 percent to 12,941.80 after trading as high as 13,139.48. It climbed 2.7 percent on Monday, lifting the index out of a bear market. "There was no reason to be bullish this morning, other than a couple of reverse trades," a Tokyo-based trader said. "Volatility is ongoing and we will have this kind of days until the (upper house) election in July ... People are also looking at the FOMC." Markets are looking to the Fed to clarify the outlook on its massive stimulus programme when the U.S. central bank concludes its two-day policy-setting meeting on Wednesday. Many investors have been cutting their long Japanese equities and short yen positions on concerns that the Fed will scale back its stimulus this year and after the Nikkei had rallied more than 80 percent from mid-November to its 5-1/2 year peak hit on May 23. Since then, trading in Japanese equities has been extremely volatile. Disappointment over a growth strategy unveiled by the Japanese government recently and worries over slowing growth in China have also contributed to the market tumult. Underscoring the volatility, since May 23 the Nikkei has had 15 sessions where intraday swings exceeded 2.5 percent, compared with 16 such trading days for the year up to May 22 and four such days in the whole of 2012. The U.S. S&P 500 only has had one such trading day in 2013, and the Euro STOXX 50 index has 11. Sony Corp climbed 4.5 percent on Tuesday after New York-based hedge fund company Third Point said it had raised its stake in the Japanese firm and asked for an opportunity to present its proposal for a partial spin-off of Sony's entertainment unit to the board. It was the most traded stock on the main board by turnover. The broader Topix index eased 0.3 percent to 1,081.58, with volume at 34 percent of its full daily average for the past 90 trading days. "We have witnessed an improvement in fundamentals (as confirmed during the Q1 earnings) and thus believe the recent correction provides a good entry opportunity for the medium term," BNP Paribas wrote in a note. The brokerage recommended investors sell put options on Toyota Motor Corp, lender Sumitomo Mitsui Financial Group, Toshiba Corp and Fujifilm Holdings Corp with September expiry to take advantage of high implied volatility. Toyota was up 0.7 percent and the second-most traded, while Toshiba gained 1.3 percent and Fujifilm added 0.7 percent. Sumitomo Mitsui Financial Group dropped 1.4 percent, a slightly bigger drop than the 1 percent fall in the banking sector . The benchmark Nikkei has fallen 19 percent since that mulityear high on May 23, but is still up 4.5 percent since April 4, when the Bank of Japan unveiled sweeping stimulus measures and has risen 24.5 percent this year.