* Saudi slips for second straight day
* Petrochemical, retail sectors are main drags
* Egypt slips on weaker pound as local traders sell
* Dubai down on profit-taking but trading volume robust
* Qatar bucks trend with QNB top performer
By Celine Aswad
DUBAI, Dec 13 (Reuters) - Stock markets in the Gulf pulled back on Tuesday as investors turned their attention to an expected U.S. interest rate hike on Wednesday and the upcoming Saudi Arabian state budget for 2017.
In Riyadh, the index declined for a second straight session, falling 0.8 percent. Trading volume shrank by roughly half from Monday's very large amount.
Investors have been readjusting their portfolios in anticipation of the 2017 budget announcement, which is expected late this month.
Bankers and analysts in touch with Saudi economic officials say the 2016 deficit is likely to have shrunk much more than originally projected, and this plus higher oil prices should give the government room to spend a little more on economic development projects next year.
But more domestic fuel subsidy cuts still look likely in the 2017 budget. Mohammad al Shammasi, chief executive of Riyadh-based Derayah Financial, said the market's uptrend was pausing temporarily, though any pullback in the lead-up to the budget announcement would not be major.
"The government had already made it clear in last year's budget announcement that there will be further subsidy cuts, but I don't think the impact will be as negative on sentiment as it was then."
Nevertheless, on Tuesday petrochemical shares remained weak, with all 14 listed producers retreating. Saudi Kayan Petrochemical closed 1.7 percent lower.
Retail shares were also hit, with apparel retailer and mall operator Fawaz Alhokair slumping 5.5 percent.
But Knowledge Economic City rose 1.5 percent in heavy trade after the company said it had sold land to hospital operator Mouwasat for a capital gain of 32 million riyals ($8.5 million), which would be reflected in its fourth- quarter results. Mouwasat fell 0.2 percent.
In Egypt, the index pulled back 0.5 percent in a volatile session, with selling pressure escalating in the final hour.
A little over 80 percent of shares in the index declined with Orascom Telecom, the most heavily traded stock, falling 2.6 percent after rising by the same percentage on Monday.
Foreign investors, who have been buyers of stocks since the central bank floated the Egyptian pound on Nov. 3, remained net buyers, bourse data showed.
The Egyptian pound hit an all time low against the U.S dollar on Monday, trading at 18.50 pounds. A weaker currency will hurt local traders who have seen their purchasing power erode, but it may encourage international funds to continue buying shares at a cheaper exchange rate.
Dubai's main index, which rose on Monday to its highest level this year and above technical resistance on its August peak of 3,624 points, pulled back 0.9 percent to 3,625 points.
Trading volume shrunk by roughly a fifth from the previous session but held well above this year's average, suggesting foreign investors remain interested in the market.
Mobile phone operator du fell 2.8 percent and real estate giant Emaar Properties dropped 1.3 percent.
But GFH Financial Group jumped 3.2 percent in heavy trade after multilateral development bank Arab Petroleum Investments Corp bought 30 percent of Falcon Cement Co, Bahrain's largest cement producer, from GFH. The companies did not disclose a purchase price but GFH has previously valued Falcon at $120 million.
Abu Dhabi's index closed down 0.2 percent but well above its session low. Trading volume shrank by roughly two-thirds from Monday. The main drag came from blue chips with Union National Bank closing 1.1 percent lower.
Qatar's main index, however, bucked the regional downtrend to climb 0.7 percent in modest volume.
The index is still down 0.5 percent since the start of the year but has gained 7.9 percent since Nov. 29. A Reuters survey of fund managers, published at the end of last month, found more regional funds prepared to return to Qatar because of attractive dividend yields.
Qatar National Bank, the largest listed stock, was the top performer on Tuesday, rising 2.4 percent.
* The index fell 0.8 percent to 7,108 points.
* The index lost 0.5 percent to 11,385 points.
* The index fell 0.9 percent to 3,625 points.
* The index slipped 0.2 percent to 4,540 points.
* The index rose 0.7 percent to 10,398 points.
* Kuwait's index rose 0.6 percent to 5,672 points.
* The index slipped 0.2 percent to 1,188 points.
* The index added 0.6 percent to 5,732 points.
Editing by Andrew Torchia and Susan Fenton