Weak October sales and profit falls from top store groups Marks & Spencer Plc and Primark frayed British retailers' nerves as the crucial Christmas countdown began.

What customers tell us is that they want to protect Christmas ... Smaller treats, they definitely want, Marks & Spencer (M&S) Chief Executive Marc Bolland said on Tuesday as Britain's biggest clothing retailer reported a 10 percent drop in first-half earnings.

However, he warned shoppers also planned to go out less, particularly on New Year's Eve, adding to the uncertainty about retailers' busiest trading period of the year. While stay-at-home Britons might buy more food and drink, they might also cut back on more expensive purchases like partywear.

Bolland said M&S wanted to own the territory of Saturday night, hence its promotional and marketing tie-up with The X Factor TV show and big push on Dine in meal deals.

He also highlighted a few encouraging early signs for Christmas such as higher gift wrap and card sales than last year and a 10 percent year-on-year gain on food orders.

Britons have been curbing spending as their disposable incomes are squeezed by rising prices, muted wages growth and austerity measures, and as they worry about a stagnant housing market, job security and a fragile economic recovery.

Industry group the British Retail Consortium (BRC) said on Tuesday a 0.6 percent year-on-year fall in October sales from stores open more than a year augured badly.

This is evidence of the basic weakness of consumer confidence and demand and (is) worrying this close to Christmas, BRC Director General Stephen Robertson said.

He urged Chancellor George Osborne to ease the pressure on shoppers and store groups alike by reining in planned increases in fuel duty and business rates.

While retailers are hopeful of stronger demand this Christmas than last, when sales were hit by heavy December snow, analysts say recent weak trading has left stores with high stocks that could lead to a frenzy of discounting.

M&S said promotional activity in clothing, footwear and homewares markets was up 5 percentage points year on year in its first half to October 1.

We expect this sort of promotional pressure in the market to continue in the second half, said Bolland.

M&S, which also sells upmarket food, said full-year gross profit margins would be flat as a result, at the bottom end of previous guidance.

Data from market research group Kantar Worldpanel, meantime, showed a step up in price competition between Britain's supermarket groups was doing little to boost sales.

While grocery sales were up 4.6 percent year-on-year in the 12 weeks to October 30, that was down from 5.1 percent in the 12 weeks to October 2 and despite a pick up in inflation to 6.1 percent -- suggesting shoppers are cutting back on the amount they buy and/or switching to cheaper ranges.

Analysts at brokerage Shore Capital said Christmas was shaping up to be a repeat of the past few years, with little growth and weaker players driven out of business.

Expect further failure from the weak; others will simply eat their market share, they forecast.

PROFITS SQUEEZED

M&S, which serves 21 million Britons a week from around 700 stores and has over 350, mainly franchised, stores overseas, said it made profit before tax and one-off items of 315.2 million pounds in the 26 weeks to October 1.

That was just ahead of analysts' average forecast of 311 million, according to a company poll.

Sales from British stores open more than a year fell 0.7 percent in the second quarter, the first quarterly decline for two years, with a 2.5 percent drop in general merchandise sales only partly offset by a 1 percent rise in food.

While warning of the pressure on profit margins, M&S said it was keeping a tight rein on costs, forecasting they would rise around 3 percent this financial year, compared with its initial estimate of 5 percent. Analysts said that should protect full-year profit expectations, which had been trimmed prior to the first half update.

M&S shares were up 2 percent at 333 pence at 1403 GMT, outperforming the STOXX Europe 600 retail index.

Bolland, who plans to spend 600 million pounds over three years revamping M&S's British stores, said customer feedback from 15 pilot outlets was very positive.

Some analysts think the 127-year-old group should scale back its investment given the gloomy economic outlook.

Clothing chains have been feeling extra pressure from unseasonably warm weather, higher cotton prices and wage inflation in key manufacturing countries such as China.

Discount clothing chain Primark showed the pain from higher costs with an 8 percent drop in adjusted operating profit to 309 million pounds for the year ended September 17.

The chain, owned by Associated British Foods, said a recent fall in cotton prices should ease the pressure in the coming financial year, although that would take time to feed through.

AB Foods shares were up 2.2 percent at 1,136 pence.

(Editing by Mike Nesbit and Hans-Juergen Peters)