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UPDATE 1-Pressure mounts at Tesco as British sales slide worsens

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LONDON, June 4 (Reuters) - Tesco, Britain's biggest retailer, posted the worst quarterly drop in underlying sales in its key home market since Chief Executive Phil Clarke took the helm in 2011, raising further questions over his trading strategy.

Clarke is two years into a multi-billion pounds turnaround plan for its British business which contributes two-thirds of sales and profit for the group, the world's third-largest retailer after Wal-Mart and Carrefour.

Tesco said on Wednesday sales at UK stores open over a year, excluding fuel and VAT sales tax, fell 3.8 percent in its fiscal first quarter, hurt by price cuts and a weak food market, and that it expected the difficult times to continue.

That was however better than some analysts feared after the release of weak market share data on Tuesday, and the company said it was pleased with the early results from its turnaround programme.

Analysts had forecast a decline of 3.5-4.1 percent, after a fall of 3 percent in the fourth quarter of Tesco's 2013-14 year.

Analysts also estimate that the result is the weakest performance for over a decade for the British market leader, although Tesco does not give a breakdown of quarterly results going back that far.

"We are pleased by the early response to our accelerated efforts to deliver the most compelling offer for customers," said the firm.

"We expect this acceleration to continue to impact our headline performance throughout the coming quarters and for trading conditions to remain challenging for the UK grocery market as a whole."

Tesco is battling a British grocery market growing at its lowest rate for 11 years as stagnant wages keep consumer spending in check.

In common with Britain's three other big grocers, Wal-Mart's Asda, Sainsbury's and Morrisons, it is also being squeezed between hard discounters Aldi and Lidl and Waitrose and Marks & Spencer at the premium end.

Asda and Morrisons have pledged to cut prices, while Sainsbury's has vowed to remain competitive, raising analysts' concerns about a possible price war hitting earnings across the industry.

"I'm not making any promises about sales improvement in the next few quarters," Clarke told reporters.

The result at Tesco is two straight years of profit decline and forecasts for a third in the 2014-15 year after Clarke guided in April that same store sales would be negative for some time.

Vowing to win back shoppers with millions of pounds of price cuts and by accelerating the pace of change at larger stores, it has spent billions on store refits, staff, product ranges and online services, but it has so far failed to deliver an improvement in underlying sales.

The turnaround programme has also resulted in the group dropping a profit margin target, which was the highest in the industry, as price cuts hit sales going through the till if they are not offset by volume gains.

International sales showed some improvement in the first quarter.

"The key concern now is that if UK like-for-like sales growth rates continue at this level then management might need to consider cutting capital investment again," analysts at Cantor said.

"Tesco management should provide more evidence that the current strategy is working otherwise we could expect UK margins to fall below the current 4.5 percent (down 50bps) this year."

(Reporting by James Davey; editing by Kate Holton)

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