Morgan Stanley advised investors to cut holdings in Supervalu Inc and Safeway Inc as rising food costs threaten to dent results, sending shares of two down 6.8 and 3.4 percent, respectively.

Traditional U.S. supermarket operators have been under intense pressure since the U.S. economy declined and their profits could be at risk if they are not able to raise prices to offset higher costs for food, analysts have said.

There has probably never been a tougher time for supermarkets, said Bill Bishop, chairman of retail consultancy Willard Bishop.

Investors had had been hoping for something of a recovery in 2011, but that has been dashed by continued challenges, including cautious consumer spending, a long-running price war and competition from general merchandise retailers ranging from dollar stores to Wal-Mart Stores Inc .

Those factors caused investment firms like Morgan Stanley and BMO Capital Markets to temper expectations for the coming year.

Morgan Stanley on Tuesday cut Supervalu and Safeway to underweight from equal weight.

Shares of Supervalu were down 65 cents at $8.96 in afternoon trading, while Safeway was down 76 cents to $21.73, both on the New York Stock Exchange.

Supervalu's plan to cut prices to close the gap with rivals like industry leader Kroger Co will hurt margins and lengthen the time it will take the company to improve profitability, Morgan Stanley analysts said in a client note.

The third-largest U.S. grocery chain is more leveraged than its rivals, carrying long-term debt of nearly $8 billion from its purchase of Albertsons in 2006. Its same-store sales, a key gauge of retail health, have fallen as it has struggled to retain market share.

BMO Capital Markets also cut its stock rating on Safeway -- to market perform from outperform -- and reduced its 2011 earnings estimates on Safeway by 10 cents to $1.73.

BMO's prior earnings target for Safeway was too aggressive, analyst Karen Short said in a conference call with investors.

Amid a still quite choppy retail environment, BMO reduced estimates for Kroger but maintained its market perform rating, Short said.

The brokerage lowered its rating on Whole Foods Market Inc to market perform from outperform. While fundamentals were strong for the upscale grocer, it will be harder for it to surprise investors with better-than-expected earnings, Short said.

We won't see (profit) beats of the magnitude we saw in 2010, Short said.

Shares of Whole Foods fell 3.7 percent to $48.87, while Kroger shares were off 1.9 percent to $21.60. Shares in Wal-Mart, which sells more groceries than any other U.S. retailer, were up 0.4 percent to $54.80.

(Reporting by Lisa Baertlein; Additional reporting by NR Sethuraman in Bangalore; Editing by Don Sebastian and Tim Dobbyn)