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While some store chains cited a blizzard that hit the East Coast after Christmas, investors seemed more concerned that December sales showed that consumers have still not returned to spending habits seen before the financial crisis and that they will continue to be frugal.

In particular, middle-of-the-road clothing retailers like Gap and American Eagle Outfitters, and mass-appeal department store retailers like Kohl's Corp and Macy's Inc, failed to meet Wall Street's expectations and their shares got hammered as a result.

Of the top 5 losers on the S&P 500 index , three were retailers, Gap, discounter Target Corp and video game retailer GameStop Corp.

"The turbulence is here to stay," said David Bassuk, a managing director at consulting firm AlixPartners. "The consumer is still very sensitive to even slight fluctuations in prices -- the consumer is still looking for deals."

The Standard & Poor's retail index fell 1.6 percent, its lowest level since early December. By contrast, the broader S&P 500 fell just 0.2 percent.

December sales at stores open at least a year for the 28 major retailers tracked by Thomson Reuters rose 3.1 percent, below Wall Street's forecast of a 3.4 percent increase.

Chains that beat forecasts included department stores J.C. Penney Co Inc and Dillard's and off-price retailer TJX Cos.

TJX unexpectedly reported a same-store sales gain and raised its outlook, sending its shares up 6 percent. But Penney noted that shoppers had spent less per transaction, citing a general need to discount that continued into the holiday shopping season. Its shares fell 1.26 percent.

WALLETS BACK IN POCKETS

Now that Christmas is over, consumers, whose spending accounts for about 70 percent of the U.S. economy, are putting their wallets away.

"I want money in my bank account and my 401k back to where it used to be," said Patricia Welcoy, a legal assistant shopping on Wednesday in Manhattan and toting a T.J. Maxx bag.

Unemployment is still hovering just below 10 percent, and efforts by Americans to pay down high household debt loads are limiting their ability to shop as often as they once did.

New U.S. claims for unemployment benefits rose more than expected last week, although a decline in the four-week average to a more than two-year low indicated some improvement in the labor market.

The International Council of Shopping Centers forecast same-store sales will rise 2.5 percent to 3 percent in January and 3 percent to 3.5 percent in 2011. Chief Economist Michael Niemira said discount chains would see big gains, partly because of higher food prices.

Treasury Secretary Timothy Geithner pressed lawmakers to raise the nation's $14.3 trillion debt limit to allow the United States to borrow more and avert a crisis in the coming months.

House Budget Committee Chairman Paul Ryan, a Republican, said he recognized the need to allow the government to go deeper in debt.

"Will the debt ceiling ... have to be raised? Yes," said Ryan, who leads Republican efforts to slash deficit spending.

But he called for deep spending cuts in 2012 and the Pentagon announced it would trim its budget by $78 billion as both government and opposition in Washington vied to outdo each other in promises of tighter spending.

Geithner said the federal government may hit the ceiling by March 31 on the amount of debt it is legally allowed to issue, and urged Congress to raise it before then to avoid pushing the United States into default.

"Even a short-term or limited default would have catastrophic economic consequences that would last for decades," Geithner said in a letter to Senate Majority Leader Harry Reid, a Democrat.

Republicans won control of the House of Representatives in November elections on a promise to cut government spending and reduce debt but are faced with having to compromise on the debt limit.

They say any vote to increase the ceiling must be paired with a commitment to lower federal costs over the long term.

"The American people will not stand for such an increase unless it is accompanied by meaningful action by the president and Congress to cut spending," House Speaker John Boehner said.

DEFAULT DANGERS

A debt default would throw markets into turmoil and dramatically increase government borrowing costs for years to come, further increasing the U.S. debt burden and sapping resources from the economy.

Bond investors remain wary of the safety and soundness of sovereign debt after the bailouts of Greece and Ireland last year, but Treasury officials said they did not see any evidence of such concerns pushing up U.S. debt yields at this time.

A Treasury official urged lawmakers preparing for a new budget not to mix up the debt limit issue with calls for greater restraint in government spending.

The official, who spoke on condition of anonymity, expressed confidence that Congress will raise the debt limit if only because not doing so would be so damaging.

"Even a short-term or limited default would have catastrophic economic consequences that would last for decades," Geithner said in a letter to U.S. Senate Majority leader Harry Reid that was issued by Treasury.

Geithner said it was hard to pin down exactly when the current $14.3 trillion ceiling on the debt limit would be pierced but urged Congress to act before the end of the first quarter to avoid the risk of pushing the United States into default.

At a briefing later, a U.S. Treasury official urged lawmakers preparing for a new budget, and a likely fractious debate over spending, not to mix up the debt-limit issue with calls for greater restraint in government spending.

CONFIDENT CONGRESS TO ACT

The official, who spoke on condition of anonymity, expressed confidence that Congress will raise the debt limit if only because not doing so would have such a damaging impact.

"Our view is this needs to get done, it will get done," the official said.

Exactly when the existing debt ceiling, which was approved only last February, will be pierced is not certain, but Treasury said it was looming.

"The Treasury department now estimates that the debt limit will be reached as early as March 31, 2011, and most likely between that date and May 16, 2011," Geithner wrote.

He said Treasury could engage in extraordinary measures, such as suspending sales of state and local government securities and thus delay the date by which the debt limit is reached "by several weeks" but preferred not to do so.

"Once these steps have been taken, no remaining legal and prudent measures would be available to create additional headroom under the debt limit, and the United States would begin to default on its obligations," Geithner said.

If that happened, Geithner said, there would be consequences for the U.S. economy "potentially much more harmful than the effects of the financial crisis of 2008 and 2009."

The U.S. Treasury official said the department expected Congress to "do the responsible thing" and to lift the debt limit so that the United States can keep borrowing to fund its daily operating needs.

(Editing by Padraic Cassidy)

Analysts are expecting an average rise of 3.4 percent in December sales at stores open at least a year for the 28 major retailers tracked by Thomson Reuters. That would cap the best holiday season since before the recession.

The results could signal a welcome boost for consumer spending, which accounts for 70 percent of the U.S. economy, but now that Christmas is over, shoppers seem poised to put their wallets away.

"I want money in my bank account and my 401k back to where it used to be," said Patricia Welcoy, a legal assistant shopping on Wednesday in Manhattan and toting a T.J. Maxx bag.

Unemployment is still hovering just below 10 percent, and efforts by Americans to pay down high household debt loads are limiting their ability to shop as often as they once did.

"The turbulence is here to stay," said David Bassuk, a managing director at consulting firm AlixPartners. "The consumer is still very sensitive to even slight fluctuations in prices -- the consumer is still looking for deals."

Initial reports showed wholesale club operator Costco Wholesale Corp's U.S. same-store sales rose 4 percent, below expectations, while teen fashion chain Wet Seal posted an unexpected drop.

The Standard & Poor's Retail Index gained 23.4 percent in 2010, but has not budged much since early December on worries that consumer spending growth will slow. Shares of retailers will rise further only if the companies increase their profit forecasts, Wall Street analysts say.

The holiday season was humming along until a massive East Coast snowstorm disrupted shopping the week after Christmas, which accounts for 15 percent of seasonal sales.

Research firm ShopperTrak said on Wednesday that retailers did not make up all of the $1 billion in retail sales it said shoppers put off because of the storm.

BJ's Wholesale Club Inc said the snowstorm had hurt December sales, which ended up below forecasts. Drugstore chain Walgreen Co also missed estimates on disappointing pharmacy sales.

Results from Victoria's Secret parent Limited Brands Inc came in slightly above expectations.

Teen retailers, who are subject to the whims of adolescent tastes and frequently need to slash prices, showed mixed results. Zumiez's same-store sales were up 9.2 percent, but still fell short of forecasts of an 11.5 percent gain. Buckle Inc's 6.1 percent gain topped estimates.

Hot Topic's same-store sales fell again, down 1.7 percent, but still beat expectations.

Those set to report December sales on Thursday include Macy's Inc, off-price retailer TJX Cos Inc and upscale department store chain Saks Inc.

Wall Street's forecast of higher retail sales was consistent with a jump in auto sales for December.

(Reporting by Phil Wahba; additional reporting by Dhanya Skariachan)

At 0932 GMT (4:32 a.m. ET), futures for the Dow Jones, S&P 500 and Nasdaq were all up 0.1 percent.

The FTSEurofirst 300 .FTEU3 index of leading European shares was up 0.5 percent at 1,148.41 points, near the highest since September 2008, with ENI (ENI.MI) among the gainers as crude prices hovered around $90.

The weekly initial jobless claims are released hard on the heels of an ADP report showing private employers added a surprising 297,000 jobs in December. The jobless figures are expected to show a bounce that would offset some of last week's decline. A poll of 20 economists by Reuters saw an increase to 400,000 from 388,000 the week before.

U.S. retailers should post another month of strong sales gains for December, capping their best holiday season since 2007, although the risk of a blizzard-induced drop-off at the end of the month is high. Chains such as J.C. Penney (JCP.N) and Abercrombie & Fitch (ANF.N) will report same-store sales numbers.

Shares in BP (BP.L) and Transocean (RIGN.VX), up 2.2 and 3.1 percent respectively, shrugged off a scathing report from a U.S. Presidential panel which blamed the United States' worst ever oil spill on risky decisions the companies made.

Qatar's oil minister said on Thursday that OPEC will meet before its scheduled date in June if the market falls short on supplies.

Monster Worldwide Inc's (MWW.N)A monthly gauge of online labor demand in the United States in December edged down from the previous month, but was 13 percent above the reading from a year ago.

The creation of three times as many private-sector jobs as expected turned Wall Street's early losses into gains on Wednesday, extending a rally investors worried had come too far too fast.

The Dow Jones industrial average .DJI gained 0.3 percent; the Standard & Poor's 500 Index rose 0.5 percent; the Nasdaq Composite Index .IXIC added 0.8 percent.

(Reporting by Brian Gorman; Editing by Mike Nesbit)