* 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 targeting shares in British retailers, betting on more weak results and share price falls after a number of disappointing updates on Christmas trading.
Despite signs the British economy is improving, several retailers have failed to benefit as household incomes remain under pressure and consumers switch to those with the best online 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 like for like or underlying sales over Christmas, while the latter cut its 2014 sales growth forecast.
Both have attracted short sellers, who borrow a security and sell it in the hope of being able to buy it back at a lower price 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 short sellers, rose 6.6 percent in the week to Jan. 14, while short interest in the broader index was flat, Markit data showed.
Around 2.2 percent shares of all retailers' shares are out on loan, against 1.2 percent for the FTSE 350 as a whole.
Short interest in Morrison and Sainsbury rose 14 percent and 6.1 percent over the week, respectively, while the price of their shares fell 1.5 percent and 2.3 percent. Around 4.6 percent of Sainsbury's and 5.3 percent of Morrison's shares are out on loan.
FURTHER TO FALL
Beyond food retail, department store Debenhams and mother and baby products retailer Mothercare also saw demand to borrow their shares surge after poorly received updates.
"The fact that these shorts have gone up implies that short sellers think the shares have further to fall," Alex Brog, director at Markit, said.
Investors have also positioned for negative updates from retailers yet to publish Christmas statements.
Europe's No. 2 electricals retailer Dixons Retail, due to report on Thursday, has seen the proportion of its shares out on loan double in the past week, although the ratio remains at 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, although these also remain at around 2 percent.
Shares in fashion retailer ASOS fell on Tuesday when the group said growth had slowed in two key markets, taking the shine off a big jump in Christmas sales.
The stock trades on a racy multiple of 107 times forecast earnings for the year through August, according to Reuters data, compared with just 12 times for Debenhams for example, making it vulnerable to even the slightest setback.
Ocado, valued at 164 times forecast earnings, is due to update the market on Thursday. (Editing by David Holmes)