* Up-down ratio shows market is oversold
* Market at 5% below Nikkei 25-day moving average
* China-related stocks volatile as short-sellers cover positions
* Mothers, Jasdaq markets also slide
By Ayai Tomisawa
TOKYO, May 14 (Reuters) - Japan's Nikkei tumbled to a more than a three-month low on Tuesday morning, as China defied Washington by announcing retaliatory tariffs, dragging most sectors into negative territory.
China said it would impose higher tariffs on $60 billion in U.S. goods despite President Donald Trump's warnings not to retaliate against additional tariffs on Chinese imports announced by the White House on Friday.
The Nikkei share average dropped 0.7 percent to 21,036.92 at the midday break, after falling to as low as 20,751.45, the lowest since mid-February. It is near downside support at 20,756, 5% below its 25-day moving average, a level considered to be oversold.
"Investors are concerned how much damage the trade war will cause on Japan's real economy and financial market," said Shusuke Yamada, vice president and chief Japan FX strategist at Bank of America Merrill Lynch.
Automakers, shippers and banking shares tumbled. Mazda Motor and Subaru Corp both slid 3.1%, Mitsui OSK Lines fell 1.6% while Mizuho Financial Group dropped 0.9%.
But traders added that with signs of the market being oversold, some short-term investors were buying back cyclical stocks they had earlier shorted.
Manufacturers with large exposure to China were volatile, with Komatsu Ltd flat at 2,374.5 yen after slumping 4% earlier, Fanuc Corp was up 0.1% after dropping 2.9% in early trade. Yaskawa Electric rose 0.7% after sliding 4.5%.
The broader Topix shed 0.8% to 1,529.44, after falling to a more than four-month low of 1,508.85.
The toraku ratio, or up-down ratio, stood at 71. A level below 80 signals an oversold market. The ratio is calculated by dividing the 25-day moving average of stocks on the Tokyo Stock Exchange's first section that gained by the 25-day average of those that fell.
Small cap markets also lost ground, with Mothers sliding 2.1% and the Jasdaq market shedding 1.1%. (Editing by Jacqueline Wong)