* Nikkei off 1.0 pct, Topix down 0.9 pct * Mothers index nosedives on retail investors' selling * China cash crunch worries still weigh - analysts * Market to resume upward trend after July poll - Goldman Sachs By Ayai Tomisawa TOKYO, June 26 (Reuters) - Japan's Nikkei share average dropped below the 13,000-mark on Wednesday in volatile trade as worries about a cash crunch in China remained, while the mood was soured by retail investors' heavy selling in small cap stocks. The benchmark Nikkei ended 1.0 percent lower at 12,834.01. Early in the session, it was up as much as 1.7 percent on robust U.S. data and assurances from China's central bank that it will offer funds to banks if needed. The market turned down as investors responded to falling Dow Jones Industrial Average futures , which indicated U.S. stocks likely will fall when trading opens on Wednesday. "Investors who are trading in Asian trading hours are monitoring China, while they shift their attention to U.S. futures in the afternoon," said Nobuhiko Kuramochi, a strategist at Mizuho Securities. Also hurting sentiment was selling in small-to-mid size stocks by retail investors, triggering a sharp sell-off in the Mothers market, which nosedived 12 percent. "Small caps are mainly owned by retail investors, but hedge funds also own them as they chase short-term momentum. When retail investors sell them heavily, hedge funds bear a liquidity risk and have to cut losses," said Yasuo Sakuma, portfolio manager at Bayview Asset Management. Biochemical companies PeptiDream Inc sank 28 percent, Takara Bio Inc nosedived 15 percent and Soiken Holdings Inc tumbled 13 percent. The broader Topix shed 0.9 percent to 1,069.28. Market players said that foreign investors and retail investors remained worried that China was sliding towards a liquidity crisis. They added that concerns about the U.S. Federal Reserve's plan to scale back its stimulus also kept them from investing in risky assets. "Worries over China's banking system and economy still weigh on the markets," said Hiroaki Hiwada, a senior strategist at Toyo Securities. China's central bank said late Tuesday that it had given cash to some institutions facing temporary shortages and would continue to do so if needed. In spite of the comments, the Nikkei China 50 index fell 0.6 percent, while companies with high exposure to China weakened, with Hitachi Construction Machinery Co falling 2.1 percent and Fanuc Corp dropping 1.6 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 unveiled growth strategy. GOLDMAN UPBEAT ON LONG-TERM PROSPECTS Goldman Sachs, however, remained upbeat on the market, reiterating its 12-month Nikkei target of 17,000, 32 percent above Wednesday's close. "The Japanese market's current consolidation phase may persist until the July 21 Upper House elections," the brokerage wrote in a note. "But beyond the elections, the market is likely to resume an upward trend, driven by reform progress, additional policy stimulus measures, positive earnings surprises, and confirmation of a domestic macro recovery," it said. The Nikkei index is still up 23 percent this year, helped by Prime Minister Shinzo Abe's sweeping fiscal and monetary expansionary policies aimed at pulling the world's third-biggest economy out of a two-decade long slump.