UPDATE 1-US retail holiday sales seen up 1.6 pct - ShopperTrak

* U.S. holiday sales seen up 1.6 pct

* Traffic seen down 4.2 percent

CHICAGO Oct 20 (Reuters) - U.S. retailers should see a 1.6 percent increase in sales this holiday season, compared with a year earlier, amid improving consumer confidence, though traffic at stores should be down 4.2 percent, retail research company ShopperTrak forecast on Tuesday.

Expectations for the 2009 holiday season compare with a year earlier, when the credit crunch and financial market meltdown caused consumers to slash spending and led to the worst drop in holiday sales in more than 40 years.

"While retailers still haven't recovered from this blow, energy prices have retreated, foreclosures have been stabilized, unemployment is rising at a slower rate, and our data shows retail traffic has been slowly increasing which indicates consumer sentiment could be rising heading into the season," Bill Martin, co-founder of ShopperTrak, said in a news release.

But consumers are still cutting back on trips to the store and visiting fewer stores, he said, adding that consumers are expected to continue to focus on stores that "offer the most value" during November and December. (Reporting by Brad Dorfman, editing by Dave Zimmerman)