RPT-PREVIEW-Extended discounts to weigh on Aug US retail sales

* WHAT: U.S. retailers report August sales

* WHEN: Sept. 1-2

* Same-store sales seen up 2.4 pct -Thomson Reuters

* Markdown cycle carries over from July

* Discounters with best gains, teen apparel weaker

By Brad Dorfman

CHICAGO, Aug 31 (Reuters) - U.S. retailers are expected to show modest sales gains for August, using discounts to attract customers as a weak economy raises concerns about clearing fall merchandise from the shelves before the key holiday season.

Many retailers said inventory picked up in the second quarter, with some having boosted orders a bit after the economy showed signs of recovering earlier this year.

Those encouraging signs have since petered out and the past several months have been marked by steady discounting, potentially weighing on same-store sales for companies like Gap Inc (GPS.N) and J.C. Penney Co Inc (JCP.N) when they report their monthly results this week.

"February and March really gave retailers a bit of a head fake," said Ken Perkins, president of research firm Retail Metrics. "It looked like the economy really turned the corner and there was a surge in demand."

That prompted "incremental" increases in retailer inventories, "and that's certainly going to hurt here as they struggle to clear merchandise from what's been a slow summer," he said.

Those promotions picked up significantly in the last week of July and into August, analysts said.

Consumers at the lower end of the economic spectrum continue to be hurt the hardest and are spending erratically, said Richard Hastings, consumer strategist at Global Hunter Securities. That is causing retailers to work harder to promote bundles of products and bring in shoppers, he said.

Some industry-watchers fear the discounts could accelerate dramatically in September if retailers cannot entice enough people to their stores during the upcoming Labor Day weekend.

"Although we have not yet witnessed panic discounting, it feels like that scenario is just around the corner," Thomas Filandro of Susquehanna Financial Group wrote in a note to clients. (For a comparison of several retailers that report monthly sales, please click: r.reuters.com/bur28n )

Analysts on average expect a 2.4 percent increase in sales at stores open at least a year, according to Thomson Reuters data. That estimate takes into account 28 retailers that report monthly sales. Many of the country's largest chain operators, including Wal-Mart Stores Inc (WMT.N) and Best Buy Co Inc (BBY.N), do not report monthly sales.

August is also the end of easier comparisons, as retailers posted monthly declines through August 2009, but started to see an uptick in September. Meager growth could further dampen the weak pace of the U.S. economic recovery, as consumer spending represents more than two-thirds of the economy.

Since the beginning of May, when most retailers started their second quarter, the Standard & Poor's retail index .RLX is down 16 percent, compared with an 11 percent decline in the S&P 500 .SPX.

HIGH-LIFE AT THE HIGH END

On Friday, the Commerce Department said the U.S. economy grew at a slower pace than originally estimated. [ID:nN26193565] The Thomson Reuters/University of Michigan Surveys of Consumers also showed consumer sentiment dipped in late August from earlier in the month. [ID:nN27256063]

The economic angst seems to be concentrated among low-income shoppers, who are most vulnerable to the high unemployment rate, Hastings said.

"Once you go into middle income and above, then the spending starts to become more smooth," he said.

Higher priced retailers like Nordstrom Inc (JWN.N) and Saks Inc (SKS.N) are expected to post two of the largest same-store sales increases, up 6.1 percent and 5 percent, respectively, according to Thomson Reuters data.

Discounters are also expected to do well as a sector, posting a 3 percent gain, as consumers seek low prices.

Apparel overall (up 2.4 percent) and teen apparel in particular (up 1.5 percent) are expected to be among the weakest sectors as shoppers bought clothes closer to when they planned to wear them.

"That's just not conducive to selling a lot of denim and black pants," Perkins said of two top fall trends. (Reporting by Brad Dorfman; Editing by Michele Gershberg and Matthew Lewis)