* Nikkei trades 8.5 pct below its 25-day moving average
* All Topix's subsectors in the red
* Market may stay sluggish until FOMC, BOJ meeting next week - traders
* Oil shares underperform hit by lower oil prices
By Ayai Tomisawa
TOKYO, Jan 20 (Reuters) - Japan's Nikkei share average fell on Wednesday morning as sliding oil prices continued to keep investors on edge, compounded by the dollar's faltering rebound.
The Nikkei dropped 1.9 percent to 16,728.98 in midmorning trade. The benchmark index is trading 8.5 percent lower than its 25-day moving average of 18,274.15. A gap of 5 percent or more indicates that the market is oversold.
U.S. crude oil wallowed at its lowest since 2003 after the world's energy watchdog warned the market could "drown in oversupply". U.S. crude futures shed another 49 cents to a new trough at $27.97 in early trade, while Brent crude was quoted at $28.76 a barrel.
The dollar's rebound has stalled, which has also sapped risk appetite. The dollar was at 117.24 yen at 0200 GMT after it had risen as far as 118.115 yen overnight.
Japanese stocks recovered on Tuesday after falling for three straight days, but the rebound will likely be short-lived as investors await the outcomes of central bank policy meetings this month.
"Investors do not want to take large positions now. We may not see major activities until we get some indications from central bank meetings," said Isao Kubo, equity strategist at Nissay Asset Management, adding that the market will likely stay sluggish for the time being.
Both the U.S. Federal Reserve and the Bank of Japan are due to hold policy meetings next week.
Inpex Corp fell 3.8 percent and Japan Petroleum Exploration Co dropped 3.3 percent.
Toyota Motor Corp shed 1.8 percent, Honda Motor Co declined 2.0 percent and Nissan Motor Co tumbled 3.4 percent.
Bucking the weakness, Nippon Express Co jumped 4.6 percent after the Nikkei business daily said that cheap crude oil prices pushed the transport company's operating profit up 12 percent on the year to a record high for the April-Dec period.
The broader Topix shed 1.6 percent to 1,367.55, with all of its 33 subsectors in the red. The JPX-Nikkei Index 400 fell 1.6 percent to 12,322.15. (Reporting by Ayai Tomisawa; Editing by Eric Meijer)