* CEO says UK consumer outlook improving
* 2017-18 profit down 8 pct
* 2018-19 profit forecast down 2.9 pct
* Shares rise as much as 7 percent (Adds detail, CEO, analyst comment, shares)
LONDON, March 23 (Reuters) - British clothing chain Next reported an 8 percent fall in annual profit and forecast a third straight decline this year but said the squeeze on UK consumers should ease.
Shares in Next, which trades from more than 500 stores in the UK and Ireland and operates the Directory internet and home shopping business, rose as much as 7 percent on the company's more optimistic comments - the FTSE 100 index's biggest riser.
Next shares have increased 23 percent over the last year but are trading well below levels of two years ago.
Next Chief Executive Simon Wolfson said 2017 was the most challenging year it had faced in 25 years.
"A difficult clothing market coincided with self-inflicted product ranging errors and omissions," he said.
Several British retailers have struggled to cope with the tough trading conditions, with job cuts and store closures darkening the mood on the high street. Next's comments on the economic outlook provide some relief.
"It was reassuring to read a sector outlook comment that didn't have everybody hiding under the covers," said analysts at Peel Hunt.
Next had been Britain's most successful clothing retailer this century in terms of profits but has faltered over the last two years as consumer spending has increasingly moved away from clothing towards holidays and entertainment.
Spending has also been under pressure from inflation running ahead of wage rises, as well as economic uncertainty due to Brexit. However, official data this week showed UK inflation easing and wages growth picking up.
"Our sense is that the headwind from negative real incomes will work its way out of the economy in the year ahead," Wolfson told Reuters.
The flip side of better wage growth is that it increases the chances of the Bank of England raising borrowing costs.
Wolfson said he was not unduly worried by that prospect.
"The benefit of a growing economy and growing real wages will far outweigh the cost of increased interest rates," he said.
Wolfson also said the outlook for prices in 2018-19 was much more benign as the impact on import costs of the fall of the pound after the 2016 Brexit vote has now worked its way through the system.
Next would pass any reduction in costs to shoppers by way of lower prices, he said.
Next made a pretax profit for the year to the end of January of 726.1 million pounds ($1.03 billion) - a touch above its guidance of 725 million pounds but down from 790.2 million pounds made in 2016-17.
Total sales fell 0.5 percent to 4.1 billion pounds. The dividend was flat at 158 pence a share.
The group maintained its guidance for 2018-19 issued in January -- full price sales growth of 1 percent and a 2.9 percent fall in pretax profit to 705 million pounds, reflecting operational costs continuing to grow faster than sales.
However, it is forecasting a 1.4 percent rise in earnings per share, reflecting its share buyback program.
It appears in better shape than many other retailers in Britain.
Toys R Us UK and electricals group Maplin have collapsed into administration, fashion retailer New Look and floor coverings firm Carpetright are restructuring and closing stores, while department store John Lewis and home improvement firm Kingfisher have cautioned on the market outlook.
A severe cold snap and snow storms in late February and early March also hit trading.
"There was one week where we had 60 shops shut for three days and that was painful but one week never really defines a year or even a season," said Wolfson. ($1 = 0.7084 pounds) (Editing by Sarah Young/Keith Weir)