The devastation in Japan is set to worsen the negative short-term sentiment gripping a vulnerable U.S. stock market, with companies exposed to Japan and the nuclear energy sector likely to take the biggest hits.

The disaster brought on a flurry of short bets against Japanese stocks on Friday, and that trend could well accelerate on news of deteriorating conditions in Japan over the weekend.

The massive earthquake and tsunami are now estimated to have killed 10,000 people and left officials scrambling to avoid meltdowns at three nuclear reactors.

U.S. investors are likely to further their bearish positions in options on the iShares MSCI Japan Fund as well as buys of the ProShares UltraShort MSCI Japan .

The EWV exchange-traded fund aims to return to the investor double the opposite of whatever the MSCI Japan does, so when the index rises 1 percent the ProShares should go down 2 percent. Volume in that ETF hit a record on Friday.

The effects on the broad U.S. market are harder to determine. The S&P 500 fell below its 50-day moving average last week and support appears to be waning, despite a rally on Friday.

Investors are likely to focus on the ramifications for energy companies, particularly nuclear power. Japanese officials said there may have been a partial meltdown at the No. 1 reactor of a nuclear plant in Fukushima.

The disaster could prove to be a setback for nuclear power as an alternative energy source, said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. Whether or not we see a reaction in utilities and engineering and construction companies remains to be seen.

The Van Eck Market Vectors Uranium and Nuclear Energy exchange-traded fund hit a 52-week high on February 8, rising 7 percent in the two weeks after President Barack Obama proposed additional funds for nuclear power.

Among the NLR's top components that could get hit on Monday are big uranium mining names including Cameco Corp and Uranium One Inc . Both are also among the top components in the Global X Uranium ETF .

Nuclear-powered countries may reexamine expansion efforts or expend more on safety and security at plants. It may impact the two biggest nuclear operators in the United States, Exelon Corp and Entergy Corp as they could face a renewed push for more regulation.

Obama has been a supporter of an expanded nuclear energy program, but that will be called into question now. In February, the White House asked for $36 billion in federal loan guarantees to help finance the building of nuclear power plants.

Nuclear loses in the near term. Conventional oil, natural gas, and coal are the winners, David Kotok, chief investment officer at Cumberland Advisors in Sarasota, Florida, wrote in a Sunday commentary.

That may hurt shares of Edison International and PG&E Corp

, which operate nuclear power plants on the earthquake-prone California coast.

U.S.-listed shares of Japanese companies will trade lower in line with their Japan counterparts, including auto manufacturers Toyota Motor Co and Honda Motor Co , which have shut all domestic auto factories.

Major insurers and reinsurers with exposure to the Japanese market were hit on Friday and could weaken further, including American International Group and ACE Ltd .

MIDDLE EAST STILL WEIGHS; FED AWAITED

Investors are also still grappling with political protests in the world's top oil exporter, Saudi Arabia.

The market's recent weakness revived talk a correction is near, analysts said, even though stocks recovered from early losses on Friday to finish the day higher with the Dow back above 12,000 and the S&P 500 above 1,300.

Stocks have rallied sharply since the start of September, with the S&P 500 up 24 percent for that period, but faltered in the last two weeks. At Friday's close, the Standard & Poor's 500 Index <.SPX> was down 1.3 percent for the week.

The jump in crude oil prices to 2-1/2-year highs has raised anxiety about their dampening effect on the economy.

Given those concerns, investors will be tuned into any comments on energy from the Federal Reserve when it releases a statement on Tuesday afternoon following its policy meeting.

The U.S. central bank is unlikely to hint at policy changes this week, and is expected to keep interest rates near zero.

For the week, the Dow Jones industrial average <.DJI> fell 1 percent, the S&P 500 slid 1.3 percent and the Nasdaq <.IXIC> lost 2.5 percent.

Besides a break below the 50-day moving average earlier this week, the S&P 500 fell below a long-standing trendline, suggesting the benchmark index has lost momentum and that the recent rally may be losing steam.

That behavior tells you demand has weakened, which puts odds on further downside in the near term, said Chris Burba, short-term market technician at Standard & Poor's in New York.

If the S&P 500 falls below 1,275, the next support area is 1,227 to 1,177, he said.

(Reporting by Caroline Valetkevitch; Additional reporting by Doris Frankel in Chicago, David Gaffen in New York, and Julie Gordon in Toronto; Editing by Dale Hudson and Jan Paschal)

Japan Quake