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* Takeover by Sainsbury's was blocked by regulator
* First quarter underlying sales fall 1.1%
* Sales up 0.5% adjusted for Easter
* Parent Walmart weighing IPO for Asda (Adds detail, Asda CEO, Walmart finance chief comment)
LONDON, May 16 (Reuters) - Asda, the British supermarket arm of U.S. giant Walmart, reported a dip in quarterly sales and warned of an "increasingly challenging backdrop" after regulators thwarted its plan to merge with rival Sainsbury's .
Asda attributed the sales decline to the timing of the busy Easter trading period this year - Easter Day was April 21 this year rather than April 1 in 2018.
Walmart said this week that it would look at a stock market listing for Asda after Britain's competition regulator blocked the 7.3 billion pound ($9.3 billion) takeover by Sainsbury's, saying it would mean higher prices for consumers.
The pair had wanted to combine to boost scale and buying power to better compete with market leader Tesco and counter the march of fast growing German-owned discounters Aldi and Lidl, and Amazon.
Asda said its like-for-like sales fell 1.1% in the three months to March 31. That compares with a rise of 1% in the previous quarter and ends a run of seven straight quarters of growth.
However, adjusting for the later Easter, Asda's like-for-like sales, excluding petrol, increased 0.5%, it said.
Asda said its gross profit rate and operating income both declined in the quarter, while higher operating expenses partly reflected costs associated with the failed merger.
"We remain entirely focused on delivering our strategy, without the benefits the proposed merger with Sainsbury's would have delivered," said Asda Chief Executive Roger Burnley.
He also cautioned: What has got us here, wont get us where we need to go with the rate of change accelerating, we have a tough job to do and need to go even faster. "
Burnley's strategy is focused on lower prices, more innovation in own-brand products, better store standards and improvements in its e-commerce operations.
He highlighted a 10% increase in online grocery sales in the quarter and increased penetration of Asda's own brand products. Asda plans another 80 million pounds of price cuts in the balance of 2019.
STOCK MARKET LISTING?
Of Britain's big four grocers Tesco appears to have the most momentum, having last month reported a 34% jump in full-year operating profit.
However, all of the big four, including No. 4 Morrisons , are still losing market share to the discounters.
The Sainsbury's deal had offered a potential exit route for Walmart from the UK.
When the deal was blocked analysts speculated that Walmart could try to sell Asda to private equity.
However, Walmart, which purchased Asda for 6.7 billion pounds in 1999, said on Tuesday it was "seriously considering" a path to a public listing for Asda, though it cautioned that any preparations for an IPO would "take years".
"We're focused on continuing to execute the strategy to strengthen Asda's long-term success, including the potential of an IPO at some point in the future," Walmart Chief Financial Officer, Brett Biggs said on Thursday.
"Well be thoughtful and measured in our approach," he said.
Separately on Thursday Walmart reported its best comparable sales growth for the first quarter in nine years. ($1 = 0.7815 pounds) (Reporting by James Davey Editing by Keith Weir)