Negative bets against UK supermarket stocks at record high-Markit

* Sainsbury, Morrison most shorted FTSE 100 stocks -Markit (NasdaqGS: MRKT - news)

* Short interest on UK supermarket sector at record high

* Top companies still facing competition from Aldi, Lidl

* Odey, Marshall Wace have 'short' holdings in sector

* Sainsbury due to post Q1 update on June 10

By Sudip Kar-Gupta

LONDON, June 9 (Reuters) - Negative bets against British supermarket stocks are at record highs, according to financial information firm Markit, as traders step up their attacks after weak corporate sales figures in the last month.

Markit's findings show major hedge funds are sticking with bearish views on the sector, even as the outlook regarding British consumer spending has started to improve.

While interest rates have stayed at record lows, wage growth has also started to improve, and data on Tuesday showed an increase in British retail sales in May, with a stabilisation in food sales.

However, WM Morrison, Sainsbury, Wal-Mart's Asda and Tesco (Xetra: 852647 - news) all reported weak figures from late April through to May, with the top four supermarket operators facing competition from lower prices offered at Aldi and Lidl.

"Clearly, there is a part of the investment community that feels the downgrade cycle for the supermarkets has not come to an end," said Clive Black, head of research at Shore Capital.

Markit said 'short interest' on those four - namely a measure of the amount of shares lent to speculators betting on a fall in those shares - was at a record high of 11.02 percent.

This level stood at more than 15 percent on Sainsbury and Morrison, which made them the two most 'shorted' shares in Britain's benchmark FTSE 100 equity index,

Markit added that 'short' interest had also risen in online grocer Ocado, which is in the FTSE 250 index and has faced the same price war issues as its bigger rivals.

In order to profit from a stock falling, short sellers can borrow the stock and sell it, expecting it to drop in value so they can buy it back at a lower price and pocket the difference.

According to regulatory filings, leading hedge funds with 'short' positions in Sainsbury and Morrison include Odey Asset Management and Marshall Wace. Both firms declined to comment on their Sainsbury and Morrison holdings.

Morrison shares trade on 15 times its forecast earnings over the next 12 months (P/E ratio), while Sainsbury has a comparable P/E ratio of 11.8, putting both at a slight discount to a sector average ratio of 16, according to Thomson Reuters StarMine data.

Shares (Berlin: DI6.BE - news) in Sainsbury and Tesco have fallen around 10 percent over the last month, while Morrison is down by around 5 percent.

Beaufort Securities sales trader Basil Petrides and Central Markets' trading analyst Joe Neighbour said the UK supermarket stocks remained vulnerable.

"I think they still look valid short bets", said Neighbour. (Reporting by Sudip Kar-Gupta; Editing by Tom Heneghan)