UPDATE 2-Whitbread posts sharp fall in Q1 Premier Inn sales

* Q1 total sales up 2.5 percent

* Premier Inn Q1 RevPAR down 9.6 percent

* Pub restaurants Q1 LFL sales up 2 percent

* Costa Coffee Q1 LFL sales up 2.6 percent

* Targeting leisure customers in school summer holidays

(Adds CEO, analyst comment, background, shares)

By Matt Scuffham

LONDON, June 16 (Reuters) - Whitbread (WTB.L), Britain's biggest hotel operator, on Tuesday reported a sharp decline in first-quarter trading at its budget Premier Inn chain, as tough comparatives and discounting from rivals hit sales.

Whitbread said total sales at Premier Inn, which contributes about three-quarters of its profits, were flat in the thirteen weeks to May 28, with like-for-like sales down 7.9 percent and revenue per available room (RevPAR) down 9.6 percent. Premier Inn, which has 576 hotels in Britain, faced tough comparative sales figures following strong growth in the first quarter last year and has come under pressure from 4 and 5 star operators cutting prices.

"We are trading in some very harsh economic conditions. There's a lot of discounting going on but nobody's better placed to come out of this recession in better shape than we are," Chief Executive Alan Parker told reporters on a conference call.

Upmarket rivals such as InterContinental Hotels (IHG.L) and Millennium & Copthorne (MLC.L) have been hit even harder by the global economic downturn.

Last month, InterContinental Hotels reported a 44 percent drop in first-quarter profit while M&C said pretax profit halved in the first quarter as demand worsened across all the regions in which it operates.

Around two-thirds of Premier Inn customers are currently businesses but the group is hoping to lift its presence in the leisure market.

As part of that plan, it last week launched a 29 pound per night offer in selected Premier Inns, with the focus on increasing bookings for the forthcoming school summer holidays.

Parker said the group could benefit from more people staying in Britain this summer rather than holidaying abroad.

"We see this as particularly fertile ground at the moment. In the first week, we have been very pleased with the results. I think the school holiday period, where the offer is initially launched, is going to see quite an increase in bookings for us."

Parker added that he expected "some benefit" from customers coming from new members of the European Union coming into London for short breaks.

Whitbread said overall trading in the first quarter was in line with its expectations, with total sales up 2.5 percent driven by growth at its pub restaurants division and Costa Coffee chain.

Like-for-like sales at the pub restaurants, which include the Beefeater and Brewers' Fayre chains, rose by 2 percent during the quarter, as offers such as two main meals for nine pounds on weekdays proved popular.

The group said its Costa Coffee business had seen an 18.5 percent rise in total sales and 2.6 percent growth in like-for-like sales.

Shares in Whitbread, which have fallen by 8 percent since the start of the year, were down 0.9 percent to 842.5 pence at 0940GMT.

"The update highlights further weakness at Premier Inn, but this was not unexpected given aggressive discounting by competitors," said Investec analyst Matthew Gerard. (Editing by Hans Peters)