UPDATE 5-DSG says trading worse, but eases finance worries

* H1 like-for-like sales down 7 pct

* Consumer confidence has "significantly deteriorated"

* Shares rise as firm eases concerns on bank arrangements

* Shares in German rival Metro plunge on outlook worries

(Adds Metro, more economic data, updates shares)

By Mark Potter

LONDON, Oct 23 (Reuters) - DSG DSGI.L, Europe's number two electrical goods retailer, said trading conditions had got worse and cut its investment plans on Thursday, but it eased concerns about its bank loans, giving some relief to its battered shares.

"Assuming the banking system is actually underpinned and we don't get a complete collapse... we don't see any issues with banking covenants," Chief Executive John Browett told analysts on a conference call.

"We're preparing for a poor Christmas, but we don't think it's going to be completely disastrous either," he told reporters earlier.

Shares in DSG, whose store chains include Currys and PC World in Britain, Elkjop in the Nordic region and UniEuro in Italy, have plunged almost 90 percent over the past two years, hit by a downturn in consumer spending and worries over U.S. rival Best Buy's (BBY.N) entry into Europe next year.

The decline has accelerated in recent weeks on fears the firm might breach the terms of its bank loans.

At 1210 GMT, DSG shares were up 9.6 percent at 25.75 pence after trading as high as 28 pence.

"There's relief it's not worse ... The bad news was already in the price," said Pali International analyst Nick Bubb, noting that house brokers Citi and Cazenove had cut their profit forecasts ahead of the trading update.

However shares in Germany's Metro (MEOG.DE), owner of Europe's biggest electrical goods retailer MediaMarkt, dropped as much as 17 percent to a 5-1/2 year low of 21.53 euros as analysts slashed forecasts ahead of next week's third-quarter results on worries about a worsening outlook.

CONFIDENCE PLUNGES

DSG, which runs 1,200 shops and online stores in 28 countries, said sales at stores open at least a year fell 7 percent in the 24 weeks to Oct. 18, in line with the decline reported after 16 weeks.

Gross profit margins were down 70 basis points.

JP Morgan analysts said the comparable figures for the last eight weeks of the period were 4 percent easier, and so trading had clearly got tougher.

"Consumer confidence has significantly deteriorated across Europe," DSG said in its statement.

Browett said sales of large items of discretionary spending, like flat panel TVs, had particularly suffered.

Shoppers across Europe were already cutting back amid higher food and fuel costs and this has been superseded by the prospect of global recession.

Britain reported on Thursday the weakest growth in retail sales in 2 1/2 years, in September [ID:nLN570204], while Italy's businesses and consumers are taking their dimmest view of the economy since 1993, a report showed. [ID:nRAT004204]

Browett said shoppers were still spending and that DSG's new Currys Megastore in Birmingham, Britain's biggest specialist electrical store at 55,000 square feet, took 2.3 million pounds ($3.8 million) in its first four days.

The megastore is part of a transformation plan announced by Browett in May, which is also focused on cutting costs, improving stores and developing the group's online business.

Browett said results of the plan were ahead of expectations and that sales from 40 new-format PC World stores, as well as seven revamped Currys and four Currys digital stores, were ahead of the levels that would justify a more extensive rollout.

He declined to give specific figures.

To help offset trading conditions, DSG said it was cutting its capital spending plans by 15 percent, or 30 million pounds, in part by slowing down an upgrade of its IT systems.

Browett declined to comment on forecasts from some analysts the group will scrap its dividend after halving it in May.

"The talk of 'conserving cash' does not bode well (for the dividend)," said Pali International's Bubb.

Browett also vowed to put up a strong fight against Best Buy's planned expansion into Europe next year. [ID:nLN60321] (Additional reporting by James Davey in London and Sarah Marsh in Frankfurt, Editing by Chris Wickham and Rupert Winchester)