Wm Morrison Supermarkets posted a slowdown in sales growth over Christmas and predicted this year would be even tougher than 2011 as shoppers' disposable incomes are squeezed and the country teeters on the brink of recession.

I think it's going to be harder than the year we've just come out of, chief executive Dalton Philips said on Monday.

The economy is in a difficult place and wherever you look, you see this sort of lack of confidence.

Britain's retailers are mostly struggling as shoppers are hit by rising prices, muted wages growth and austerity measures, and worry about a stagnant housing market, rising unemployment and the impact of the euro zone debt crisis.

Morrisons' caution was echoed by Shop Direct, Britain's biggest home shopping retailer, which forecast lower sales in 2012, despite a 9 percent rise in Christmas sales.

Ailing music and DVDs chain HMV , meanwhile, saw an 8.2 percent drop in underlying Christmas sales.

Morrisons, Britain's No.4 grocer behind J Sainsbury , Wal-Mart's Asda and Tesco , said sales at stores open over a year rose 0.7 percent, excluding fuel and VAT sales tax, in the six weeks to January 1.

That was down from 2.4 percent growth in its fiscal third quarter and below an average forecast of 1.3 percent growth in a Reuters poll of 14 analysts, although the group said its performance was in line with the broader grocery market.

A material slowdown, said Shore Capital analyst Clive Black, who described Morrisons' performance as disappointing.

Analysts had expected Morrisons to produce the strongest sales of the three major British grocers reporting Christmas figures this week due to its strength in fresh foods and to its lower exposure to discretionary non-food goods, where shoppers have been making the biggest cutbacks.

Shore Capital's Black said data from market research firm Nielsen suggested Asda had a good Christmas, while Tesco was the laggard of the top four grocers, perhaps quite demonstrably so.

Tesco, Britain's biggest retailer, posts Christmas sales on Thursday, while Sainsbury reports on Wednesday.

At 0900 GMT, Morrisons shares were flat at 311.4 pence, in line with the STOXX Europe 600 retail index <.SXRP>.

IT'S ONLY GETTING WORSE

Philips said shopping habits over Christmas underscored the pressure being felt by consumers.

Sales in the week before Christmas were up around a quarter on two years ago, suggesting shoppers are waiting for the last minute in the hope of snapping up bargains, he said.

Over 40 percent of all sales in the grocery sector were accounted for by goods on promotion, while sales of sparkling wines at Morrisons surged 150 percent as Britons opted for a cheaper alternative to champagne, he added.

Philips also highlighted strong demand for classic Christmas foods, like turkey, sprouts and stuffing.

People (were) going back to traditional favourites because you just don't want to risk anything in these economic times, he told reporters on a conference call.

Retailers are hoping a fall in inflation and events like the Olympic Games in London and the Diamond Jubilee will spur demand in the months ahead.

But Philips saw little reason for optimism, predicting little if any growth in grocery sales volumes this year.

He said Morrisons would compete robustly in a tough market with new initiatives like its low price M Savers range.

Finance Director Richard Pennycook said Morrisons was comfortable with analysts' full-year profit forecast of around 920-925 million pounds, adding the firm had not joined in the frenzy of discounting seen at some retailers.

Pennycook declined to comment on a report that Morrisons is in talks to acquire electronics chain Best Buy's UK stores for its Kiddicare range. He added, however, that if there is an opportunity to accelerate growth of the Kiddicare business, the company would take it.

(Reporting by Mark Potter; Editing by Erica Billingham and Hans-Juergen Peters)