UPDATE 3-Tesco sees slowest UK Xmas sales growth since 1990s

* UK underlying sales up 2.5 pct in seven weeks to Jan. 10

* Group sales up 11.6 pct, international sales up 32.7 pct * Underlying non-food sales positive, taking market share

* Shares seen up as much as 2.2 percent

(Adds FD, analyst comment, more detail, background)

By Mark Potter

LONDON, Jan 13 (Reuters) - Tesco Plc (TSCO.L) reported the smallest rise in Christmas sales at UK stores open at least a year since the early 1990s, as Britain's biggest retailer felt the impact of the economic downturn.

However the supermarket chain, which takes about one in every eight pounds spent in British shops, said on Tuesday it was growing market share across a range of non-food items, including electricals, clothing and entertainment as shoppers desert specialist retailers in search of the cheapest prices.

Sales at British stores open for at least a year, excluding fuel, rose 2.5 percent in the seven weeks to Jan. 10.

That was an acceleration from the 2 percent growth reported for the 13 weeks to Nov. 22, and just above an average forecast of 2.4 percent in a Reuters poll of nine analysts. Estimates ranged from 1.7 percent to 3.0 percent.

Dealers said the shares are expected to rise by as much as 2.2 percent at the opening.

Group sales were up 11.6 percent, boosted by 32.7 percent growth in international sales. Tesco employs 440,000 people in about 4,000 stores across 14 countries.

Tesco said adjusting for the reduction in VAT sales tax, which came into effect in early December, growth on a comparable basis was 3.5 percent.

Britain's retailers are struggling as shoppers curb spending amid rising unemployment, sliding house prices and fears of a deep recession.

The British Retail Consortium said on Tuesday like-for-like sales fell 3.3 percent on the year in December, the biggest drop since the series began 14 years ago. [ID:nLAG003182]

A TOUGH YEAR

"Against the overall background of, I suspect, rising unemployment and economic slowdown it will be a tough year," Finance Director Andrew Higginson told Reuters.

Nonetheless, Tesco expects to create around 10,000 jobs in the UK this year, he added in a telephone interview.

Analysts expect Tesco to report the weakest underlying sales growth of Britain's top four grocers this Christmas, partly due to its greater exposure to non-food lines which have been hit harder than food in the economic downturn.

Last week, J Sainsbury (SBRY.L), Britain's third-biggest grocer, reported a 4.5 percent rise in like-for-like sales, excluding fuel, for the 13 weeks to Jan. 3.

But Higginson said Tesco's sales growth was being held back by the group's new discount range, which it introduced in September in a bid to attract more cash-strapped customers.

Sales volumes and shopper numbers were both up, he added in a telephone interview, without giving further details.

Tesco said like-for-like non-food sales were positive, an improvement on previous weeks, though it did not give a figure.

BlueOar Securities analyst Greg Lawless said the jury was still out on the success of Tesco's discount brands, but was impressed by the growth in sales volumes, underlying non-food sales and the 11.6 percent rise in group sales.

"They're consistently delivering double-digit (percentage) sales growth, unlike Carrefour (CARR.PA) unlike Metro (MEOG.DE)," he said, keeping a "buy" rating on Tesco stock.

Metro, Germany's biggest listed retailer, said on Tuesday its sales rose 5.9 percent in 2008. [ID:nL7728012]

Tesco shares have beaten the DJ Stoxx European Retail Index .SXRP by 3 percent over the past year. It closed at 350.3 pence on Monday, valuing the company at 29 billion pounds ($43 billion). (Additional reporting by Dan Lalor)