* Investors wary after last week's volatility * Yen-rebound hurts exporters * Funds sell Topix and Nikkei futures - analyst * Market jittery over Fed policy outlook - analysts By Ayai Tomisawa TOKYO, May 27 (Reuters) - Japan's Nikkei share average slumped 3.8 percent on Monday morning, as a rebound in the yen hammered exporters in a market still on edge after last week's turbulent trade sent the benchmark reeling to its worst loss in two years. The Nikkei dropped 555.14 points to 14,057.31 in mid-morning trade, with support pegged at 13,981.52, an intraday low hit on Friday's choppy session. A combination of factors, including worries the U.S. Federal Reserve will rollback its stimulus this year and weak factory activity data from China, Japan's second-biggest export market, triggered last week's selloff. The Nikkei dropped 7.3 percent on Thursday, it's largest single-day loss since the March 2011 earthquake and tsunami. The sour mood continued to weigh on the market in early trade, with S&P 500's decline for a third day on Friday and a rebound in the yen further undermining sentiment. "Negative sentiment is still lingering from worries that the Fed's exit strategy," said Norihiro Fujito, a senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities. "Macro hedge funds, who bought Topix and Nikkei futures, sold them last week and they are still selling them." Exporters lost ground, with Toyota Motor Corp dropping 1.1 percent while Sony Corp shedding 3.3 percent. Securities firms also took a hit, with Nomura Holdings and Daiwa Securities both dropping 3.5 percent in sympathy with the weak market. Analysts said that last week's turbulence was partly exacerbated by high frequency trading by hedge funds such as commodity trading advisors and retail investors engaging in margin trade. As a result, investors are likely to remain wary about further volatility, they said. The broader Topix dropped 2.8 percent to 1,161.07. The Nikkei has gained 35 percent this year and is up 14 percent since April 4, when the Bank Of Japan announced a sweeping monetary expansion campaign to vanquish years of deflation and revive growth. Market players said those who were buying stocks and selling the yen reversed their positions when the yield on the 10-year cash bonds rose as high as one percent on Thursday. "Last week's shock will probably last throughout this week," said Kenichi Hirano, a strategist at Tachibana Securities. "But the Japanese market's fundamentals in the mid-to-long term have not changed, so there still is upside in the longer term." As the weaker yen has improved the outlook for many exporters, analysts expect an average operating profit rise of 30 percent, compared with the companies' conservative forecasts of around a 20 percent increase in operating profits. Many exporters have used assumptions of around 90-95 yen to the dollar, while the dollar last traded at 100.85 yen. The dollar posted its worst week against the yen in a year on Friday but it is still well above what most companies were expecting. The dollar was last traded at 101.02 yen.