UPDATE 4-Tesco reports best UK sales growth for two years

* Q1 UK underlying sales up 4.3 pct, matching forecast

* Q1 group sales up 9.7 percent

* Q1 international sales up 20.1 percent

* Shares up 1.7 percent, outperforming European rivals

(Adds more FD, analyst comments, detail, background, shares)

By Mark Potter

LONDON, June 16 (Reuters) - Tesco (TSCO.L), the world's third-biggest retailer, posted its best quarterly sales rise in Britain for two years and said it was closing the gap on recent stronger growth rates at its main domestic rivals.

Britain's biggest retailer said on Tuesday first-quarter sales at UK stores open at least a year rose 4.3 percent, excluding fuel and VAT sales tax, in line with forecasts and up from 3.7 percent in the previous quarter.

Group sales rose 9.7 percent, including petrol, in the 13 weeks to May 30, with strong growth in international markets fuelled by new stores, currency moves and the benefits of an acquisition in South Korea last year.

Tesco, which makes about 70 percent of sales and three quarters of trading profit in Britain, has been losing market share for months to British rivals like Wal-Mart's (WMT.N) Asda, J Sainsbury (SBRY.L) and Wm Morrison (MRW.L).

The group, which takes almost one in every three pounds spent in a British supermarket, has said this is due mainly to customers switching to its cheaper discount range, which has boosted sales volumes but meant it has not benefited from food price inflation as much as competitors.

"The relative performance is closing," finance director Laurie McIlwee told Reuters, adding rivals were also growing strongly after fixing some "real fundamentals" in their businesses around price and availability. [ID:nLG512012]

McIlwee said Sainsbury, which is forecast to report a 7.3 percent rise in first-quarter sales on Wednesday, was also benefiting from shoppers switching out of upmarket food retailers like Marks & Spencer (MKS.L) as well as strength in south England.

NO RECOVERY YET

"An encouraging statement," said Shore Capital analyst Clive Black. "Tesco is a growth company and we see scope for it to benefit from improving economies as low ticket discretionary spend improves," he added, keeping a 'buy' rating on the stock.

At 0805 GMT, Tesco shares were up 1.7 percent at 362.3 pence, topping a 0.6 percent rise on the DJ Stoxx European retail index.