* Index heavyweights regain lost ground * Retail investors pick up small caps By Ayai Tomisawa TOKYO, Dec 17 (Reuters) - Japan's Nikkei share average rose on Tuesday morning, recouping some of Monday's losses as strong U.S. manufacturing data lifted sentiment ahead of the U.S Federal Reserve's policy meeting this week. The Nikkei rose 0.9 percent to 15,291.85 after dropping 1.6 percent to 15,152.91 on Monday, the lowest closing level since Nov. 20. Stronger economic data of late, including Monday's numbers showing U.S. manufacturing output rose for a fourth straight month in November and last month's strong payroll report, backed the view that tapering could start as soon as the Fed's meeting this week. Also lifting the mood was a strong December PMI reading in Europe, which was the second-highest since mid-2011. Monday's notable losers such as index-heavyweight stocks as SoftBank Corp and Tokyo Electron Ltd regained ground, up 1.4 percent and 2.0 percent, respectively. SoftBank was the most-traded stock by turnover. Currency-sensitive stocks also were also bought back, with Toyota Motor Corp rising 0.8 percent and Honda Motor Co gaining 1.6 percent. Timing the Fed's decision on when it will start winding down its market-friendly $85 billion monthly bond purchases remains at the centre of investor thinking, analysts said. "Until the outcome of the Fed meeting is out, the currency level may determine the direction of the Japanese market," said Yoshiyuki Kondo, an analyst at Daiwa Securities. "Foreign hedge funds are the main players, and they may create volatility in the market depending on dollar-yen levels." He added that retail investors are refraining from trading on big caps, instead picking up small caps which have growth potential, particularly Internet companies that do businesses with Line Corp, a messaging application services provider planning to go public next year. Such companies include Adways Inc and Netyear Group , which rose 3.4 percent and 4.5 percent, respectively. "Although these small caps can be volatile due to profit-taking, these shares may stay active until the end of the year," Kondo said. Galvanized by Tokyo's aggressive fiscal and monetary stimulus aimed at pulling the world's third-largest economy out of two decades of stagnation, the Nikkei is up 47 percent this year, on track for its best yearly rise since 1972.