US STOCKS-Start of 'Santa Claus rally' dampened by 'cliff' worries

* "Fiscal cliff" talks stalled until after holiday

* Equity markets close early, volume light

* Technicals point to "Santa rally"

* Indexes off: Dow 0.4 pct, S&P 0.2 pct, Nasdaq 0.3 pct

(Updates to close)

NEW YORK, Dec 24 (Reuters) - U.S. stocks edged lower on

Monday as caution over the potential for volatility driven by

worries about the U.S. "fiscal cliff" dampened enthusiasm at the

start of a seasonally strong period for equities.

Investors are betting Congress will reach a deal to avert

most of the austerity measures due to come into force at the

start of next year. That has led to the best year for stocks

since the post-financial crisis rebound. But those gains may be

quickly reversed if a deal is not reached soon.

The S&P 500 index posted its biggest drop in more than a

month on Friday as a Republican plan to avoid the cliff - $600

billion in tax hikes and spending cuts that could tip the U.S.

economy into recession - failed to gain traction on Thursday

night.

Sharp moves like that highlight how headlines from

Washington can whipsaw markets, especially during the thinly

traded period over the Christmas holiday.

Still, with the S&P 500 up 0.7 percent in December and on

course for its strongest month since September, some analysts

are predicting that stocks will find their footing during a

market seasonality known as the "Santa Claus rally."

"Right now we've seen some very constructive action in the

market so I think that bodes well for this being a positive

seasonal 'Santa' period over the coming seven days," said Ari

Wald, a technical analyst at The PrinceRidge Group.

He noted an all-time high in the NYSE advance-decline line,

which compares advancing and declining stocks, as indication of

strong participation in the rally off November lows.

"Pull-backs are buying opportunities," said Wald. "There has

been really great participation on this move, a lot of small-

and mid-cap stocks behaving well, pushing out to the upside;

we're seeing some good leadership from offensive sectors of the

market as well."

A high ratio of advancing stocks to declining issues shows

there is broad participation across the equity market.

The Santa seasonality covers the last five trading days of

the year and the first two of the new year. Since 1928, the S&P

500 has averaged a gain of 1.8 percent during this period and

risen 79 percent of the time, according to data from

PrinceRidge.

The Dow Jones industrial average dropped 51.76

points, or 0.39 percent, to 13,139.08. The Standard & Poor's 500

Index fell 3.49 points, or 0.24 percent, to 1,426.66. The

Nasdaq Composite Index lost 8.41 points, or 0.28

percent, to 3,012.60.

The S&P 500 is up more than 13 percent for the year, having

recovered nearly all the losses suffered in the wake of the U.S.

election. The yearly gain would be the best since 2009.

Some U.S. lawmakers expressed concern on Sunday the country

would go over the cliff, as some Republicans charged that was

President Barack Obama's goal. Talks are stalled with Obama and

House of Representatives Speaker John Boehner out of Washington

for the holidays.

"It does seem like we are continuing through the same drift

of the same thing we've had the past couple of weeks - 'cliff'

talk," said Nick Scheumann, wealth partner at Hefty Wealth

Partners in Auburn, Indiana.

"You can't trade on what you don't know and we truly don't

know what they are going to do," he said.

Congress is expected to return to Washington next Thursday

as President Barack Obama returns from a trip to Hawaii. As the

deadline draws closer, a 'stop-gap' deal appears to be the most

likely outcome of any talks.

Trading volume was muted, with U.S. equity markets closing

at 1 p.m. (1800 GMT) ahead of the Christmas Day holiday on

Tuesday.

In addition, a number of European markets operated on a

shortened session, with other markets closed.

U.S. retailers may not see a sales surge from this weekend

as ho-hum discounts and fears about imminent tax hikes and cuts

in government spending give Americans fewer reasons to open

their wallets in the last few days before Christmas.

Aegerion Pharmaceuticals Inc said the U.S. Food and

Drug Administration approved Juxtapid capsules in patients with

homozygous familial hypercholesterolemia, but will conduct a

post-approval study to test long-term safety and efficacy.

Shares fell 1.8 percent to $25.25.

Herbalife Ltd dipped 4.4 percent to $26.06 after the

company said it expects to exceed its previously announced

repurchase authorization guidance and has retained Moelis &

Company as its strategic adviser. The declines put the stock on

track for a ninth straight decline.

Yum Brands Inc advanced 1.8 percent to $65.01 after

Shanghai's food safety authority said the level of antibiotics

and steroids in the company's KFC chicken was within official

limits.

(Reporting By Edward Krudy; Editing by Chizu Nomiyama and Dan

Grebler)

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