* Sony to halve annual operating loss; BT cuts div, jobs
* Japan to raise economic outlook - paper
* U.S. retail sales fall, U.S., Asian markets sell off
* Geithner says U.S. financial system starting to recover
By Sachi Izumi
TOKYO, May 14 (Reuters) - Sony Corp promised on Thursday to halve this year's losses, but the electronics to entertainment giant's better-than-expected outlook offered little solace to markets vexed by glum U.S. retail sales.
A drop in U.S. retail sales and a slump in euro zone output reminded investors of the rocky road to recovery, triggering a sell-off in stocks that had rallied in the past two months on hopes the world's worst recession in decades was drawing to an end.
Sony, which competes with Panasonic for the title of the world's top consumer electronics maker, braced for another year in the red, after booking a $3.1 billion loss in January-March. But the maker of PlayStation games, Cyber-shot digital cameras and Vaio PCs predicted a smaller operating loss for this financial year than markets had expected.
The news coincided with results from Britain's BT Group, which reported a 1.28 billion pound ($1.94 billion) fourth-quarter loss, and said it would cut its dividend and another 15,000 jobs.
Such a patchwork of good and bad news made many investors cash in profits and others wonder if they may have been too quick in moving funds from the safety of cash into riskier assets such as shares, commodities and high-yielding currencies.
"The retail sales data indicated that views of a rebound for the U.S. economy could be wide of the mark," said Yasutoshi Naga, chief economist at Daiwa Securities SMBC.
Sony's outlook fell into the promising news category, but analysts were guarded in their reactions.
"The projected loss isn't as bad as expected. It's still too early to know if this is realistic, and we will be paying attention to how Sony means to push through its restructuring," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.
The news came after the Tokyo market closed 2.6 percent down and stocks elsewhere in Asia-Pacific were down 3.5 percent, heading for their biggest fall in six weeks.
The market brushed off signs that government and central bank officials were becoming more optimistic about the prospects for the world's second-largest economy, now mired in its worst recession since World War Two.
Bank of Japan Governor Masaaki Shirakawa said on Wednesday the economy showed some signs of life, while a Japanese newspaper reported on Thursday that the government was about to upgrade its economic assessment in May for the first time in over three years.
Despite the setback in U.S. April retail sales, which fell 0.4 percent, defying expectations of a stable reading, there were also some encouraging signals from Washington.
Treasury Secretary Timothy Geithner said the U.S. financial system was starting to recover and lending is starting to improve.
"We have already seen a substantial amount of adjustment in our financial system," Geithner told an audience of community bankers. "The more vulnerable parts of the non-bank financial system no longer exist."
The U.S. administration also moved to tighten the reins on the vast, loosely regulated over-the-counter trade in derivatives, largely blamed for excessive risk-taking that nearly wrecked U.S. banks and set off the global financial crisis.
The plan, sketched out by Geithner and top regulators, proposes tighter supervision and monitoring of derivatives dealers to get a better grip on the market that exploded in size in recent years and is estimated at about $450 trillion globally.
But there was enough disappointing news to keep investors on edge.
Euro zone industrial output plummeted by more than 20 percent in March, and the Bank of England warned that the world's fifth-largest economy would need more time to recover than earlier thought.
Reuters polls of more than 200 economists across Europe, Japan and the United States showed they think the world's richest nations will put recession behind them this year but, when growth returns, it will be sluggish. (Reporting by Reuters correspondents worldwide; Writing by Tomasz Janowski, Editing by Ian Geoghegan)