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

* "Fiscal cliff" talks stalled until after holiday

* Equity markets to close early, light volume expected

* Technicals point to "Santa rally"

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

(Updates to late morning)

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.

The S&P 500 index declined 0.9 percent on Friday, its

biggest drop in more than a month, 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 any

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 holidays.

Still, with the S&P 500 up 0.8 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 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.

Wald points to an all-time high in the NYSE advance-decline

line, which compares the advancing and declining stocks, as

indication of strong participation in the rally off November

lows that is setting stocks up for their best year since 2009.

A large number of advancers to decliners shows there is broad

participation across the equity market.

"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."

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 35.78

points, or 0.27 percent, to 13,155.06. The Standard & Poor's 500

Index fell 3.69 points, or 0.26 percent, to 1,426.46. The

Nasdaq Composite Index lost 10.68 points, or 0.35

percent, to 3,010.33.

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

having recovered nearly all the losses suffered in the wake of

the U.S. elections. 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 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 volumes are expected to be muted, with U.S. equity

markets scheduled to close at 1 p.m. (1800 GMT) ahead of the

Christmas holiday on Tuesday.

In addition, a number of European markets will operate on a

shortened session, with other markets closed entirely.

U.S. retailers may not see a sales surge 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 4.7 percent to $24.50.

Herbalife Ltd dipped 5.8 percent to $25.68 in

premarket after the company said it expects to exceed its

previously announced repurchase authorization guidance and has

retained Moelis & Company as its strategic advisor. The declines

put the stock on track for a ninth straight decline.

Yum Brands Inc advanced 1.7 percent to $64.98 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)

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