UPDATE 1-Palm shares surge after new phone impresses at CES

(Adds analyst quote; updates share price)

NEW YORK, Jan 9 (Reuters) - Shares in Palm Inc (PALM.O) surged over 36 percent on Friday after its new touch-screen phone and mobile operating system impressed analysts and short sellers rushed to cover their positions, giving investors hope it may win customers from rivals such as Apple Inc (AAPL.O).

The new smartphone, Pre, was introduced at the Consumer Electronics Show in Las Vegas on Thursday, and analysts said it could help Palm regain some of the market share it has lost to Apple's iPhone and Research in Motion Ltd's (RIM.TO) BlackBerry.

"Our initial reaction to the new Palm Web OS (operating system) and Palm Pre smartphone is decidedly positive," said Avian Securities analyst Avi Cohen, adding that the new product appears "elegant, intuitive, sufficiently differentiated, and... a legitimate competitor to the iPhone."

Palm shares were up $1.62 or 36 percent at $6.07 in early afternoon trade after closing up 35 percent on Thursday. Shares in Sprint Nextel Corp (S.N), the exclusive carrier for the new phone, rose 8 cents, or 3 percent, to $2.66.

CL King analyst Lawrence Harris said that at least some of the share price move related to investors looking to buy shares to cover short positions. He estimated that about 38 million of Palm's shares were held by short sellers, who sell shares they borrow in the expectation of being able to buy the shares back at a lower price to repay their loan.

"The user interface, I think most would agree was better than anticipated." he said. "The other factor at work is the large short position in the shares. Once the stock starts moving higher, the individuals who short the shares tend to cover."

Palm had about 111 million shares outstanding in late December, according to Reuters data.

Shares in Apple fell 2.2 percent to $90.68, in line with the overall market. AT&T (T.N), the exclusive carrier for the iPhone in the United States, fell 1.3 percent to $26.82.

"Palm's new Pre could drive web traffic on Sprint's network similar to the way the iPhone drove data traffic on AT&T's network, a potential positive," said J.P. Morgan analyst Ehud Gelblum. (Reporting by Ritsuko Ando in New York and Sinead Carew in Las Vegas; Editing by Derek Caney and Tim Dobbyn)