* Wholesale trade falls sharply in December
* Economy seen shrinking in December; outlook weaker for Q4 and Q1
* Foreign investors sell Canadian securities for first time since June
* Foreign appetite for Canadian "safe-haven" debt remains strong
By Louise Egan
OTTAWA, Feb 19 (Reuters) - Canadian wholesale trade shrank more than expected in December in the latest sign the economy is sputtering, adding pressure on the government as it seeks to strike a balance between spending cuts and growth-boosting measures in its next budget.
Wholesale trade fell 0.9 percent on a reversal of November's gains in the computer and communications equipment industry, Statistics Canada said on Tuesday.
Market players surveyed by Reuters had forecast, on average, a 0.4 percent drop in wholesale activity in the month.
Wholesale trade was down 0.9 percent by volume and inventories fell 0.6 percent.
The data all but confirms that the economy stalled or even contracted in December. Exports and factory sales were also weak and on Friday, Statscan will release retail sales, the final piece of the puzzle for the month.
"There is little that retail sales can do ... to offset what is likely to be a minor contraction in industry level real GDP for December," said Mazen Issa, a strategist at TD Securities.
"This is especially true when taken together against a backdrop of slowing housing and construction activity," he wrote in a note to clients.
Most economists agree the Bank of Canada's projection of 1 percent annualized fourth-quarter growth is too high. And with the weak hand-off from December, the bank's expectation of 2.3 percent first-quarter growth is also under question.
The central bank acknowledged last month that there was more slack in the economy than it had foreseen and any interest rate hikes were "less imminent".
The disappointing performance will likely weigh on Finance Minister Jim Flaherty as he prepares the Conservative government's 2013 budget, expected in March.
Flaherty has said he sees no need for additional fiscal stimulus and is undecided whether to increase spending on big infrastructure projects. He remains committed to eliminating a small deficit in time for 2015 elections.
The main opposition party, the New Democrats, is urging him to boost infrastructure spending and delay any further cutbacks to ensure the economic expansion continues.
"As federal and provincial governments prepare their budgets, they should invest in needed public services and infrastructure to spur output and employment," said Erin Weir, economist and president of the Progressive Economics Forum.
For the first time since June, foreign investors reduced their holdings of Canadian securities in December, Statscan said in a separate report that showed portfolio investments were down by $1.9 billion ($1.9 billion) from November.
Nonresidents unloaded C$6.7 billion worth of Canadian equities in the month due to cross-border acquisitions and sold C$655 million in Canadian bonds. They added C$4.8 billion in debt securities.
But overall, foreign appetite for Canadian debt remained strong as the country remains a safe haven for investors worried about U.S budget troubles and uncertainty in Europe.
Charles St-Arnaud, economist at Nomura Global Economics, said the details of the report were much better than the headline, after taking into account special factors affecting equity and flows into some government-guaranteed bonds.
"Once those factors are removed, inflows into Canadian securities were about C$8.4 billion, higher than the average over the past 12 months," he said.
"There is evidence that Canadian assets have once again benefited from some 'safe haven' flows amid the fiscal cliff negotiations."
In 2012 as a whole, foreigners bought C$83.2 billion in Canadian securities, down from C$97.3 billion in 2011.