* Tesco seen reporting modest rise in underlying Xmas sales
* DSG, Home Retail expected to post big falls
By Mark Potter and James Davey
LONDON, Jan 9 (Reuters) - A raft of Christmas sales updates from UK retailers next week is likely to underscore the trends seen so far, with food and discount chains coping in the economic downturn, but sellers of discretionary items suffering.
Tesco (TSCO.L), Britain's biggest retailer, is expected to report a modest rise in underlying sales on Tuesday, held back compared to some of its supermarket rivals by a greater exposure to non-food lines like clothing and electricals.
In contrast DSG International DSGI.L, Britain's biggest electrical goods retailer, and top household goods group Home Retail HOME.L are forecast to deliver big falls in underlying sales on Thursday.
Trading updates published so far suggest there was no collapse in spending over Christmas, as some had feared.
This has sparked a rally of about 6.8 percent in the FTSE All-Share Retail Index .FTASX5370 since the start of the year, and to some speculation the worst might be over for retail stocks, with falling interest rates, food and fuel prices all set to help the beleaguered consumer in the coming months.
But with store groups warning trade will stay tough while unemployment is rising, house prices are falling and the economy is sinking deeper into recession, many analysts remain cautious.
"Consumers are being buffeted by very serious headwinds that will substantially limit their spending over the coming months," said IHS Global Insight economist Howard Archer.
This will force retailers to keep prices low and could drive more out of business, following the collapse of toys-to-DVDs chain Woolworths and furniture group MFI last year, he said.
Tesco, the world's third-biggest retailer, will report a rise in sales from UK stores open at least a year, excluding fuel, of between 1.7 percent and 3 percent for the six weeks to Jan 3, according to a Reuters poll of six analysts.
That would be below the 4.5 percent reported by smaller rival J. Sainsbury (SBRY.L) for the 13 weeks to Jan. 3, in part because of Tesco's greater presence in the non-food market.
Tesco has also seen a strong uptake for its new range of discount brands which, because they are cheaper products, has depressed sales values. It believes the higher sales volumes the new range is generating will stand it in good stead if consumers rein in spending further in the coming year.
Discount clothing retailer Primark is also likely to sound upbeat when its parent Associated British Foods (ABF.L) releases a first-quarter trading update on Thursday.
Sellers of expensive or discretionary items, however, are likely to be finding life much tougher.
DSG, Europe's second-biggest electrical goods group, is expected to report a drop in like-for-like sales of between 7 and 12 percent for the 12 weeks to Jan. 10, according to a company poll of analysts.
Shares in the owner of PC World and Currys chains in Britain, UniEuro in Italy and Elkjop in Nordic countries, have slumped 73 percent over the past year amid concerns it might breach the rules covering its debt arrangements and worries over U.S. rival Best Buy's (BBY.N) entry into Europe next year.
Carphone Warehouse CPW.L, Europe's biggest mobile phone retailer, is also likely to sound downbeat at a third-quarter trading update on Thursday, though JP Morgan analysts think the bad news is factored in after a profit warning last year.
News from Home Retail, the owner of Argos stores and the Homebase do-it-yourself chain, is likely to be grim as well.
Argos is set to report a drop in underlying sales of 7 percent to 9 percent for the 18 weeks to Jan. 3, with Homebase down by 8.5 percent to 12 percent, according to a Reuters poll of four analysts.
As well as weak consumer demand, non-food retailers have had to contend with clearance sales at casualties of the downturn, such as Woolworths and rival entertainments chain Zavvi.
This could impact computer games retailer Game Group GMG.L and music and books group HMV HMV.L, which have sales updates on Tuesday and Thursday respectively. However, analysts think both will be benefit in the long term from reduced competition.
Analysts also expect a big fall in sales at sporting goods chain JJB Sports JJB.L on Thursday and are keen to hear how talks on long-term funding for the company are progressing.
For a FACTBOX on Christmas trading updates from UK retailers please click on [ID:nL584273]
Editing by Sharon Lindores