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UPDATE 2-Tesco reports strongest UK sales growth in seven years

* Quarterly UK like-for-like sales beat forecasts

* 10 million more customer transactions year-on-year

* Tesco says its inflation significantly below market trend (Adds detail, CEO, CFO, analyst comment, shares)

LONDON, June 16 (Reuters) - Tesco, Britain's biggest retailer, has cemented its recovery, reporting its strongest quarterly sales performance in its home market in seven years despite rising prices.

Chief Executive Dave Lewis has been leading a fightback after Tesco's profits were hammered by changing shopping habits, the rise of German discounters Aldi and Lidl and an accounting scandal in 2014.

He stabilized the business and then got it growing again with a focus on lower prices, new and streamlined product ranges, better customer service and much improved supplier relationships. Tesco remains Britain's largest supermarket by a wide margin.

The group, which in January agreed to buy wholesaler Booker for 3.7 billion pounds ($4.7 billion), said on Friday that UK like-for-like sales rose 2.3 percent in the 13 weeks to May 27, a sixth straight quarter of growth.

The outcome was ahead of analysts' forecasts, in a range of up 1.7-2.0 percent, and built on growth of 0.7 percent in the previous quarter.

"The key focus for this quarter has been working with our supplier partners to protect our customers from inflation. Today's numbers show the benefit of our approach," Lewis told reporters.

The performance was driven by 1.3 percent growth in customer transactions, 10 million more year-on-year, and by volume growth in fresh food of 1.6 percent.

Tesco shares rose as much as 4.4 percent, but gave up those gains on wider concerns about a deteriorating consumer environment in Britain and lower international sales.

The stock is up 17 percent year-on-year but down 13 percent so far in 2017.

Britons have been hurt by a rise in inflation, caused in large part by the fall in the value of the pound since last year's vote to leave the European Union, and by a slowdown in wages growth.

FLEXING ITS MUSCLES

Tesco, which has a share of around 28 percent of the UK grocery market, says it is not passing on as many cost increases to shoppers as its competitors.

By purchasing a tighter range of goods and working more closely with its suppliers, Tesco is able to exploit its huge purchasing scale.

Lewis said Tesco's grocery inflation in the quarter was 1.5 percentage points below the most recent measure by industry researcher Kantar Worldpanel of 2.9 percent.

"At the moment inflation in Tesco is significantly below the market trend," he said.

Bernstein analyst Bruno Monteyne said Tesco's inflation number "reflects working together with suppliers, not margin compression."

Tesco's finance chief Alan Stewart said the group's margin and cost savings targets were unchanged after the update on the first quarter of its financial year.

Analysts regard Sainsbury's, Britain's second largest supermarket group, as the most exposed to a weaker economy after buying general merchandise retailer Argos.

Other analysts say the discounters remain a major threat to Tesco and its traditional rivals, highlighting renewed momentum at Aldi and Lidl, with recent industry data recording their fastest sales growth since 2015.

The trading update, released ahead of Tesco's annual shareholders' meeting later on Friday, showed group like-for-like sales rose 1 percent.

However, Tesco's international like-for-like sales fell 3.0 percent, reflecting a decision to discontinue unprofitable bulk selling activity in Thailand.

Tesco also said it had resolved a tax issue relating to the sale of its South Korean business in 2015, releasing a 329 million pounds provision. ($1 = 0.7831 pounds) (Editing by Adrian Croft and Keith Weir)