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PREVIEW-Puerto Rico Dec economic index likely to show contraction

NEW YORK, Jan 29 (Reuters) - Puerto Rico's Economic Activity Index for December will likely show further declines in business conditions, weak index component readings suggested, which would add to the growing unease over the cash-strapped island's weak financial and economic outlook.

Expected to be released as soon as this week, the EAI has been increasingly followed by hedge funds and others drawn to Puerto Rico debt by the lure of high interest rates. Tax-free yields on Puerto Rico municipal debt, which totals some $70 billion, are as high as 10 percent but have pulled back recently from a run-up that began in September.

Wall Street's top ratings agencies have all expressed worries about the island's economy, which has been in recession almost continuously for eight years.

On Friday, Standard & Poor's said it had put Puerto Rico's debt on watch for a possible downgrade, which was the latest threat faced by the U.S. territory suffering significant financial stress due to heavy pension obligations and the struggling economy.

The EAI is issued by the island's Government Development Bank and tracks Puerto Rico's business conditions through four indicators. It has fallen every month on a year-over-year basis since November 2012.

Two of the four seasonally adjusted indicators for December have already been published and show year-over-year declines.

Total employment in Puerto Rico, which is one component of the EAI, fell to 904,300 last month, a loss of 25,000 jobs compared to December 2012, according to data from the U.S. Bureau of Labor Statistics released on Tuesday. Puerto Rico's unemployment rate rose to 15.4 percent in December, more than twice the U.S. average of 6.7 percent.

Another important indicator, cement sales, fell to 1.024 million 94-pound sacks in December 2013, compared to 1.249 million sacks a year earlier, according to GDB data published Jan. 17.

The other two economic indicators that factor into the EAI reading, which is published on a varying schedule but typically shortly after the Bureau of Labor Statistics data is released, are electricity production and gasoline consumption. Both measures declined in November.

The EAI itself in November showed a year-over-year decline of 5.7 percent but officials said the index marked a modest rise over October, its third month-over-month increase in a row.

(Reporting by a Reuters Correspondent in San Juan; Writing and additional reporting by Michael Connor in New York; Editing by Meredith Mazzilli)