* Demand strong to bet on UK retail stock falls
* WM Morrison sees 40 pct spike in demand
* Home Retail still most shorted in absolute terms
* Christmas trading updates next week seen mixed
By Simon Jessop
LONDON, Jan 4 (Reuters) - Stock market bets against the UK retail sector remain heavy as companies begin to unveil Christmas trading updates, with Britain's No. 4 grocer WM Morrison Supermarkets a popular target.
While the UK's flirtation with a triple-dip recession has cast a shadow over the sector for months and will do little to spark a marked upswing in consumer confidence, Morrison is being targeted in anticipation of weak sales.
Demand to borrow Morrisons stock to sell short over the last month was up 40 percent, Alex Brog at data firm Markit said. "It's not the most shorted in absolute terms, but the rise in the last month has been significant," adding 4.3 percent of the company's stock was out on loan.
That is higher than the average in the pan-European STOXX Europe 600 Retail index, at 2.6 percent, and just behind the figures for Belgium-listed Delhaize, French supermarket Carrefour and Germany's Metro.
Demand to bet on UK retail share price falls is down slightly over the last month but still three times than for the FTSE All Share index, Markit said, higher than the European average and bucking a solid global equity outlook.
"The sector, and particularly some companies within it, remain heavily targeted by short-sellers even though many have been covering their positions," Markit's Alex Brog said.
"This means either they're less bearish on the sector or they've been taking profits in the run-up to the crucial Christmas trading period and updates next week."
Shares out on loan for the retail sector as a percentage of those available to be lent is 3.6 percent, against 1.2 percent for the broader index, Markit said. Short-sellers cut their aggregate sector position by 10.2 percent over the last month.
While overall volumes borrowed in the sector may have fallen, the cost to borrow 20 of the biggest retailers had risen 13 basis points, indicating higher demand among these companies, data from Sungard's Astec Analytics showed.
"Over the same period the average cost of borrowing on the FTSE 100 for example, fell 44 basis points," Karl Loomes, analyst at Astec Analytics, said.
Stock lending is a proxy for demand to sell a stock short, where a share is borrowed and sold on before being bought back, hopefully at a profit, and returned to the original holder.
Most shorted across the sector, as it has been for some time, is Home Retail, owner of the struggling Argos catalogue store, with 20 percent of available stock out on loan, a rise of nearly a quarter on the month.
While the bulk of the sector is due to update over the next two weeks, early numbers from firms including Next, Waitrose and John Lewis have all been positive, countering very weak UK consumer confidence data for December.
The degree to which this is mirrored in updates from the bigger listed companies is less certain, however, with many expected to show weak growth and some, such as Morrison, forecast to show a fall in sales.
Consensus estimates for Morrisons before its update on Monday is for a drop in like-for-like sales of around 2 percent, lagging peers including market leader Tesco - a view that has stirred short-sellers to action.
"Sentiment is driven by like-for-like and they are structurally disadvantaged by not being in Convenience and not being online," a London-based specialist sales trader covering the sector said, adding he would be tempted to bet against Morrison.
If results from the sector do disappoint, it could see the gap between it and the broader market widen further. The FTSE All Share index has followed regional peers on a multi-month run of gains as fears of euro zone collapse receded, and UK shares are expected to rise further in 2013.
The All Share index is up nearly 3 percent so far in January, double the gain for retail shares in the FTSE 350 .