GLOBAL MARKETS-Retailers lead US shares lower; yen hits 2-yr low

* U.S. markets slip as retailers hit

* Yen at 2-year low vs dollar, 16-month low against euro

* Retail sales fall short of expectations, shares down

NEW YORK, Dec 26 (Reuters) - The yen fell to a two-year low

against the dollar on Wednesday as Japan's new prime minister

called for weakening the currency to stimulate inflation, while

U.S. stocks fell, led by declines in retailers' shares.

Sales growth at U.S. retailers was projected to have fallen

short of expectations during the holiday shopping season,

according to preliminary estimates from firms that track retail

spending.

The S&P 500 was down 0.5 percent, with consumer

discretionary stocks among the hardest hit. The Morgan Stanley

Retail index dropped 1.9 percent.

U.S. shares were also pressured as it appeared Congress

will not negotiate a deal before Jan. 1 to avoid the "fiscal

cliff," a series of $600 billion in spending cuts and tax hikes

that would slow the U.S. economy sharply unless lawmakers take

action.

There is concern that potential tax hikes cut into U.S.

holiday spending.

"With the 'fiscal cliff' hanging over our heads, it was hard

to convince people to shop, and now it's hard to convince

investors that there's any reason to buy going into year-end,"

said Rick Fier, director of trading at Conifer Securities in New

York.

A U.S. official said on Tuesday that President Barack Obama

may return to Washington from his Hawaiian holiday as early as

Wednesday evening to resume talks.

A series of big decisions will wait until early 2013, when

tax rates are scheduled to rise for most Americans. Economists

warn that the world's largest economy could fall into recession

as a result unless action - even retroactive - is taken to

cushion the blow of higher rates and reduced spending that has

helped bolster a weak economy.

The Dow Jones industrial average was down 36.95

points, or 0.28 percent, at 13,102.13. The Standard & Poor's 500

Index was down 7.08 points, or 0.50 percent, at 1,419.58.

The Nasdaq Composite Index was down 19.01 points, or

0.63 percent, at 2,993.59.

U.S. stocks have held in a tight range, recovering losses

sustained just after the U.S. election in November. The S&P 500

is still up about 13 percent on the year.

The dollar rose as high as 85.74 yen on trading

platform EBS, the highest since September 2010, following the

swearing-in of Shinzo Abe as premier and was last at 85.64. The

euro rose as high as 113.40 yen, a 16-month high, up

1.4 percent. The euro was at $1.3215 against the dollar,

up 0.3 percent.

Abe is calling for a mix of aggressive monetary policy

easing and big fiscal spending to beat deflation and weaken the

yen. He is pressuring the Bank of Japan to adopt a 2 percent

inflation target that would auger for a weaker currency,

threatening changes at the central bank if his wishes are not

met.

"The election of Abe has had a galvanizing effect on the

dollar/yen exchange rate and he has been able to accomplish more

in two months of jawboning than the BoJ has... over the past

several years," said Boris Schlossberg, managing director of FX

strategy at BK Asset Management in New York.

Many markets remained closed following Christmas. European

exchanges were largely shuttered, and Hong Kong and Australia

were also closed. The MSCI All-World Index was

down 0.2 percent on Wednesday.

U.S. single-family home prices rose in October for the ninth

month in a row. The S&P/Case Shiller composite index of 20

metropolitan areas gained 0.7 percent in October on a seasonally

adjusted basis, stronger than the 0.5 percent rise forecast by

economists polled by Reuters.

Ten-year U.S. Treasury notes rose 4/32 of a point in price

to yield 1.762 percent.

Brent crude climbed above $110 per barrel on

Wednesday, hitting a two-month high, with investors hoping for a

last-minute deal to avoid a U.S. fiscal crisis. U.S. crude

futures gained $2.22, or 2.5 percent, to $90.83.

YEN WEAKENS

The weaker yen has bolstered hopes for better earnings from

Japanese companies and underpinned the Nikkei, which has gained

about 18 percent since mid-November, when the election was

scheduled. The yen has lost nearly 8 percent against the dollar

in the same period.

The Nikkei closed at a nine-month high on Wednesday,

with a 1.5 percent gain.

Minutes of the BOJ's policy-setting meeting in November,

released on Wednesday, showed that some board members said the

central bank must act decisively, without ruling out any policy

options, if the outlook for the economy and prices worsens

further.

MSCI's broadest index of Asia-Pacific shares outside Japan

was little changed. Shanghai shares were

flat, but stayed in positive territory on the year after a 2.5

percent jump on Tuesday erased 2012 losses. It is set for its

first annual gain in three years.

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