* Short interest in UK sector up 6.6 pct in a week - Markit
* Morrison, Sainsbury among targets after Xmas updates
* Some investors bet on disappointments from Dixon, Ocado
By Francesco Canepa
LONDON, Jan 15 (Reuters) - Speculative sellers are targetingshares in British retailers, betting on more weak results andshare price falls after a number of disappointing updates onChristmas trading.
Despite signs the British economy is improving, severalretailers have failed to benefit as household incomes remainunder pressure and consumers switch to those with the bestonline service.
Supermarket chains WM Morrison and Sainsbury have been among the prime targets of investors'negative bets, after the former reported a sharp fall in likefor like or underlying sales over Christmas, while the lattercut its 2014 sales growth forecast.
Both have attracted short sellers, who borrow a security andsell it in the hope of being able to buy it back at a lowerprice when the loan is due and thus pocket the difference.
Demand to borrow retail stocks in the FTSE 350 index of the largest British stocks, a proxy for interest from shortsellers, rose 6.6 percent in the week to Jan. 14, while shortinterest in the broader index was flat, Markit data showed.
Around 2.2 percent shares of all retailers' shares are outon loan, against 1.2 percent for the FTSE 350 as a whole.
Short interest in Morrison and Sainsbury rose 14 percent and6.1 percent over the week, respectively, while the price oftheir shares fell 1.5 percent and 2.3 percent. Around 4.6percent of Sainsbury's and 5.3 percent of Morrison's shares areout on loan.
FURTHER TO FALL
Beyond food retail, department store Debenhams andmother and baby products retailer Mothercare also sawdemand to borrow their shares surge after poorly receivedupdates.
"The fact that these shorts have gone up implies that shortsellers think the shares have further to fall," Alex Brog,director at Markit, said.
Investors have also positioned for negative updates fromretailers yet to publish Christmas statements.
Europe's No. 2 electricals retailer Dixons Retail,due to report on Thursday, has seen the proportion of its sharesout on loan double in the past week, although the ratio remainsat a relatively low 2 percent.
Even online retailers Ocado and ASOS,which could be placed to profit from bricks-and-mortar stores'misfortunes, saw increases in short interest levels, althoughthese also remain at around 2 percent.
Shares in fashion retailer ASOS fell on Tuesday when thegroup said growth had slowed in two key markets, taking theshine off a big jump in Christmas sales.
The stock trades on a racy multiple of 107 times forecastearnings for the year through August, according to Reuters data,compared with just 12 times for Debenhams for example, making itvulnerable to even the slightest setback.
Ocado, valued at 164 times forecast earnings, is due toupdate the market on Thursday. (Editing by David Holmes)