Tesco Plc, the world's No.3 retailer, said overseas markets drove a 7.2 percent rise in third-quarter sales and it was seeing a pick-up in demand in its main British market heading into peak Christmas trading.

Finance Director Laurie McIlwee said on Tuesday UK trading had been ahead of the supermarket group's expectations in recent weeks, led by sales of Microsoft Corp's Kinect gaming platform and copies of the dress worn by Kate Middleton on the day of her engagement to Prince William.

It is hard to call what the fourth quarter's actually going to be, but I would say it is going to be an improvement quarter-on-quarter in terms of like-for-like (sales), McIlwee told reporters on a conference call when asked about Christmas.

We still feel there is good growth in the UK.

International retailers like Tesco are benefiting from a global economic recovery led by Asia. But chains in Britain, where Tesco makes about two-thirds of sales and profits, are worried tax hikes and public spending cuts aimed at reining in government debt could hit demand in the months ahead.

An industry survey on Tuesday showed British retail sales growth slowed in November.


Tesco, which accounts for about one in every seven pounds spent at British retailers, said sales at UK stores open more than a year rose 1.5 percent, excluding fuel and including VAT sales tax, in the 13 weeks to November 27.

Growth had picked up to 3 percent by the end of the third quarter, despite a lower contribution from rising food prices compared with the second quarter, McIlwee said.

We are encouraged by sentiment and momentum, said Clive Black, an analyst at brokerage Shore Capital.

At 0840 GMT, Tesco shares were up 0.9 percent, beating a 0.5 percent rise on the STOXX Europe 600 retail index. The stock has lagged that index by 7 percent this year.

Tesco, which trails France's Carrefour SA and U.S. market leader Wal-Mart Stores Inc in terms of annual sales, said group sales rose 7.2 percent in the third quarter, excluding fuel and at constant exchange rates.

That included an 11 percent rise overseas.

As well as good growth in Asia, Tesco reported a 9.8 percent increase in like-for-like sales at its loss-making U.S. arm, and underlying growth in all European markets -- including crisis-hit Ireland -- for the first time in three years.

Tesco, with over 5,000 stores in 14 countries, is betting on expansion overseas and into financial services to drive growth, while seeking to maintain its dominant position in a mature British grocery market.

The group, whose international boss Phil Clarke succeeds long-standing chief executive Terry Leahy in March, last month announced bold growth plans in China, South Korea and eastern Europe..

But some analysts caution that investment returns have fallen in the expansion drive, that Tesco will struggle to turn its U.S. chain into a profitable business and that it is facing tougher competition in Britain.

McIlwee said British underlying sales, adjusted for changes in VAT sales tax, were up by between 0.7 and 0.8 percent.

That was ahead of the average forecast for a 0.3 percent increase, according to a Reuters poll of 12 analysts, and compares with recent quarterly rises of 1.3 to 2.1 percent at British rivals Asda, Sainsbury and Morrison.

Analysts think Tesco is suffering relative to British peers because it sells more discretionary non-food goods, though some are disappointed it is not doing better after several initiatives, such as the doubling of loyalty points last year.

McIlwee said non-food sales climbed 3 percent in the third quarter, including a 30 percent surge at its online Tesco Direct arm and an unspecified rise on a like-for-like basis.

(Additional reporting by James Davey; Editing by David Holmes)

($1 = 0.6382 pound)