WRAPUP 2-Central European profit plunge hits Tesco's recovery drive
* Tesco Q2 UK lfl sales, ex fuel and VAT, flat
* Sainsbury Q2 lfl sales, ex fuel, up 2.0 pct
* Tesco H1 group trading profit down 7.6 pct to 1.59 bln stg
* Tesco committed to European markets despite profit slump
* Tesco shares down 3.5 pct, Sainsbury's down 1.3 pct
LONDON, Oct 2 (Reuters) - Plunging profits in mainland Europe blew a fresh hole in Tesco's recovery plan on Wednesday, piling pressure on the world's No.3 retailer as it struggles to reverse market share losses in its main UK market and extricate itself from other foreign failures.
The supermarket group said first-half trading profit slumped 68 percent in its European division, which includes countries such as Turkey, Poland and Hungary as well as Ireland, adding to signs of a slowdown in developing markets after a warning from consumer goods group Unilever on Monday.
That, along with weaker trading in some Asian markets, dragged down Tesco's group profits for a third straight half-year and sent its shares down almost 4 percent as several analysts cut their full-year forecasts.
"With profits nosediving in Europe and Asia, the foreign markets that once provided a perfect hedge against weak demand at home are now more hurdle than help," said John Ibbotson, director of retail consultants Retail Vision.
The darling of the retail sector during two decades of uninterrupted earnings growth, Tesco has suffered in recent years from failed attempts to break into the United States and Japan and a costly, still unprofitable, expansion in China.
While it invested abroad, it also neglected Britain, where it still makes over two-thirds of sales, and started losing market share to rivals including Wal-Mart's Asda and J Sainsbury, as well as discounters Aldi and Lidl and upmarket Waitrose.
Despite being 18 months into a 1 billion pound ($1.6 billion) turnaround plan in Britain, which has included revamping stores, recruiting more staff and new product ranges, the group said sales at UK stores open over a year, excluding fuel and VAT sales tax, were flat in the 13 weeks to Aug. 24.
Though that was at the top end of analysts' expectations and an improvement on a 1 percent decline the previous quarter, it was well below the 2.0 percent rise, excluding fuel, reported by Sainsbury for the 16 weeks to Sept. 28.
Ibbotson said Sainsbury had managed a delicate balancing act which has so far eluded Tesco, with its premium "Taste the Difference" and budget "basics" ranges helping Sainsbury to fend off competition from both the discounters and Waitrose.
COMMITTED TO EUROPE
Tesco, which lags France's Carrefour and U.S. industry leader Wal-Mart by annual sales, said first-half trading profit dropped 7.6 percent to 1.59 billion pounds.
That included like-for-like sales declines in all ten of its overseas markets and particularly heavy falls in central and eastern Europe, which the company blamed on weakening economies, austerity measures and rising inflation.
Deutsche Bank analysts said European profits were 60 percent below their expectations and predicted analysts' full-year group trading profit estimate would fall 2-4 percent to 3.35-3.45 billion pounds, excluding the benefits from Tesco's move to fold its Chinese business into a state-run firm.
Despite the problems, Tesco said it remained committed to its European unit, which accounts for about 12.5 percent of group sales. It expects to benefit in the second half from curbing store openings in the region and focusing on stronger-growing convenience store and online markets.
Chief executive Phil Clarke said there were also signs the turnaround plan in Britain was working, with like-for-like food sales in the second quarter growing 1 percent, clothing sales up 8.6 percent and online grocery sales up 13 percent.
"We're feeling very positive about the changes that we've made and consumers are reacting very well," he told reporters.
Tesco has suffered more from a weak British economy than many rivals because it sells a higher proportion of discretionary non-food goods, like electricals and homewares, where shoppers have been making the biggest cut backs.
Like other retailers, both Tesco and Sainsbury were cautious about signs of an economic recovery in Britain.
"We can of course see all those encouraging signs from economic indicators but our customers tell us that they still don't have extra money in their pocket," Sainsbury's commercial director Mike Coupe told reporters.
Tesco shares, which have lagged Sainsbury's by 7 percent over the past year, were down 3.5 percent to 346.55 pence at 1050 GMT. Sainsbury's were off 1.3 percent at 385.2 pence.
(Editing by Mark Potter)