World No.3 retailer Tesco Plc posted a drop in underlying British sales for the fourth quarter in a row as cash-strapped shoppers cut spending on non-essential goods and price cuts ate into revenue in its core home market.

Chief Executive Philip Clarke said UK consumers faced severe financial pain; The UK economy is fragile, unemployment's at a 15-year peek, under-employment's rocketing, so we're facing into tough times, he said.

British retailers are nervous about consumer spending running into the key Christmas trading period following a string of profit warnings from companies such as French Connection, Game and Blacks Leisure and weak industry data for November.

We're all prepared for it (Christmas) and there's a lot to play for, Clarke told reporters on Thursday.

Store groups across Europe are struggling as shoppers' disposable incomes are squeezed by rising prices, muted wages growth and government austerity measures, and as they worry the euro zone debt crisis will plunge the region back into recession.

On Tuesday Metro, the world's No. 4 retailer, issued a profit warning, saying festive trading had started slowly.

Tesco, which takes about one in every 10 pounds spent in British shops, said sales at British stores open more than a year, excluding fuel and VAT sales tax, were down 0.9 percent in the 13 weeks to November 26, Tesco's financial third quarter.

That compares with analysts forecasts in a range of down 1.0 percent to up 0.5 percent and was unchanged from the drop of 0.9 percent in the second quarter.

It also compares with increases reported by rivals Asda, J Sainsbury and Wm Morrison, albeit for different trading periods.

The firm said its outlook for the year as a whole remained unchanged.

Tesco, which trails France's Carrefour and U.S. leader Wal-Mart by annual sales, makes around two thirds of its sales and three quarters of its profit in Britain.

The group has suffered in the economic downturn more than its main British supermarket rivals, in part because it sells more discretionary non-food goods where shoppers have been cutting back most.


Tesco hit back in September, cutting prices in a 500-million-pound investment. It then reduced prices again in November to lure in Christmas shoppers.

Clarke said he was pleased with the early response of customers to the Big Price Drop campaign, with food and grocery volume up by nearly 1 percentage point in the third quarter compared to the second.

We created deflation in our food and grocery categories but we've got volume improvement ... The Big Price Drop's having the effect we wanted it to, he said. We never expected to see it absolutely immediately in the top line because we're bringing deflation to our price list.

However, shares in Tesco were down 1.7 percent, with some analysts saying consumers' response to the price cuts had been muted.

We were hoping to see more of an improvement in momentum following the introduction of the new pricing strategy, said Espirito Santo analyst Caroline Gulliver.

Market research group Kantar Worldpanel said on Tuesday Tesco had recently lost market share to rivals.

Tesco noted continued weak demand in the more discretionary areas of general merchandise, clothing and electricals.

Finance Director Laurie McIlwee said third quarter like-for-like sales in this category were still negative but were better than the 5 percent fall in the second quarter.

Third-quarter group sales including fuel rose 7.2 percent, broadly in line with analysts' expectations.

The international business excluding fuel and on a like-for-like basis was up 1.1 percent.

Underlying sales growth in Asia slowed to 0.8 percent, held back by disruption in Thailand caused by flooding.

Like-for-like sales were up 0.9 percent in continental Europe and up 11.9 percent in the United States where the firm's Fresh & Easy business is gaining momentum.

Shares in Tesco were down 6.4 pence at 390.45 pence at 0926 GMT, valuing the business at 31.92 billion pounds.

(Reporting by James Davey and Kate Holton; Editing by David Holmes and Andrew Callus)