TORONTO (Reuters) - Bleak economic data and mounting job losses are prompting Canadians to be more frugal this holiday shopping season than they have been in the past few years, and retailers are already discounting prices in reaction, and watching their profit margins narrow.

Economists, however, do not expect a contraction in retail spending, and say the mood in the malls in Canada may be much brighter than that in the United States.

"The holiday shopping season this year will represent a big step back from the very strong sales of the past three years because of the deteriorating economic climate," said Sal Guatieri, senior economist at BMO Capital Markets. "We are going to see a more cautious shopping season."

Guatieri says he expects retail spending in December to rise by one percent to two percent year over year, compared with six percent growth in 2007 and seven percent in 2006.

In the United States, economists expect a decline in retail spending in December of about eight percent year over year.

Consumer confidence in Canada dropped in November to a 26-year low as global economic turmoil intensified, the Conference Board of Canada said last month.

"There has been so much ensuing bad news, and retail sales is all about consumer confidence, that there is some suspicion that the confidence might be waning dramatically as we approach Christmas with further news of plant shutdowns and layoffs," said Peter Barr, national consumer business leader at Deloitte Canada.

"These bits of news obviously make the consumers more nervous." A poll done by Deloitte showed that 53 percent of Canadians surveyed plan to spend the same amount on holiday shopping as they did in 2007, while 40 report said they will spend less this year.

Another survey, this one done by marketing research firm Maritz Research Canada, showed that shoppers plan to spend an average of C$571 ($475.51) on gifts, down 14 percent from the average of C$663 last year.

An Angus Reid survey showed that 37 percent of Canadians say they will spend less money than last year this holiday season, while 55 percent said their spending will be roughly equal.

This was not immediately evident in downtown Toronto this week where the big Eaton Centre mall was packed with shoppers, and there was a 60-minute wait for service at upscale jeweller Tiffany and Co . Still, fierce competition and the new sense of frugality among shoppers have prompted most retailers discount their goods deeply before Christmas instead of waiting until the traditional Boxing Day sales.

Analysts expect further steep cuts at that point.

Much of the competitive push is coming from from US-based retail giant Wal-Mart Stores .

Last month Wal-Mart Canada cut prices on thousands of items including toys, electronics and small appliances, as it braced for a sluggish Christmas season. A month earlier it chopped the prices of hundreds of toys, starting the Christmas sales period in late October.

This has led to extremely thin profit margins, as stores from the big department store chains to mom and pop operations try to keep pace.