Bellwether British retailer Marks & Spencer posted a small rise in underlying Christmas sales as discounts helped to lure cash-strapped shoppers, and said it expected trading conditions to stay challenging.

Britain’s biggest clothing retailer, which also sells homewares and upmarket foods, said this morning it was making additional cost savings to offset a fall in profit margins due to the discounting.

Sales at British stores open over a year rose 0.5 per cent excluding VAT sales tax in the 13 weeks to December 31st, its financial third quarter.

That included a 1.8 per cent fall in general merchandise sales and a 3 per cent rise in food sales, against forecasts for a fall of 1.5 per cent and a rise of 1.5 per cent respectively.

In its second quarter, Marks & Spencer (M&S) reported a 0.7 per cent fall in underlying British sales.

Britain's retailers are mostly struggling as disposable incomes are squeezed by rising prices, muted wages growth and austerity measures, and as shoppers worry about a weak housing market, rising unemployment and the euro zone debt crisis.

The British Retail Consortium reported a surprise 2.2 per cent rise in December retail sales on Tuesday, but said weak business a year earlier flattered the figures and warned discounting could hit stores' profits.

Clothing retailers have been at the forefront of that price cutting as mild weather combined with weak demand to leave them with piles of unsold winter garments.

"In light of the ongoing macro-economic uncertainty, we expect trading conditions to remain challenging," said M&S, which serves about 21 million Britons a week from around 700 stores and has over 350 mainly franchised outlets overseas.

Shares in the 128-year-old group have lagged the STOXX Europe 600 index by 11 per cent over the past year.

Reuters