UPDATE 1-NYSE short interest hits record high in late May

(Adds analyst comment, background, byline)

By Emily Chasan

NEW YORK, June 5 (Reuters) - Short interest on the New York Stock Exchange rose 2.7 percent in late May to hit a fresh record high, the exchange said on Thursday, suggesting an increase in bearish sentiment in the stock market.

As of May 30, short interest jumped to about 16.43 billion shares, compared with 15.99 billion shares as of May 15.

That figure topped a previous record high of 16.01 billion shares hit in mid-March.

Short interest as of May 30 was equal to 4.3 percent of the total shares outstanding on the NYSE, the exchange said.

Investors who sell securities "short" profit from betting stocks will fall. Short-sellers borrow shares and then sell them, waiting for the stock to fall so they can buy the shares back at the lower price, return them to the lender and pocket the difference.

"The shorts have been flooding the market with sell orders like we have never seen before," said Dylan Wetherill, president of ShortSqueeze.com, a Web site that tracks short interest data.

The latest increase in short selling came amid worries about record high oil prices and concerns that financial companies could face more credit market troubles ahead.

The benchmark Standard & Poor's 500 index fell more than 1.6 percent between the two settlement dates from mid-May to late May.

But Wetherill predicted the sharp increase in short selling could force short sellers to rapidly buy stock and close out positions if the market stabilizes.

"They made a lot of money on the way down so they have a lot of profit to fuel more short selling," Wetherill said. "But if the market does not cooperate, the short sellers could end up flooding the market with massive buy orders that would fuel the market higher." (Editing by Leslie Gevirtz)