CORRECTED - UPDATE 2-John Lewis adds to UK retail gloom, M&S falls again

(Corrects paragraph 12 to show sales up 9.7 percent on the period two years ago, not up 9.7 percent in the same period last year)

By Mark Potter

LONDON, July 4 (Reuters) - British retailer John Lewis [JLP.UL] reported a big drop in weekly sales at its department stores and slower growth at its upmarket supermarkets, providing further evidence of a downturn in consumer spending.

The weak sales added to the pressure on rival Marks and Spencer (MKS.L), whose shares fell 6 percent to a near 7-year low of 221 pence in early Friday trading after joint broker Citi cut its rating on the stock to "sell" from "buy".

John Lewis said sales at its eponymous department stores dropped 8.3 percent in the week ended June 28, compared to the same week a year earlier, while sales at its Waitrose supermarkets were up 3 percent. Kaupthing analysts estimated that, stripping out stores opened during the past 12 months, sales fell more than 10 percent at the department stores and were down slightly at Waitrose.

"A double digit like-for-like decline confirms the pinch on spending generally as John Lewis is a slightly better-than-average barometer," they said in a research note.

Marks and Spencer (M&S) sent shockwaves through the UK retail industry on Wednesday by issuing a profit warning and saying food shoppers were switching to cheaper rivals.

The news added to mounting signs that Britons are tightening their belts amid rising fuel, food and mortgage costs.

The UK general retailers index .FTASX5370 has plunged about 40 percent this year on concerns of a downturn in spending. An Ernst & Young survey, released on Friday, showed the average British household was 15 percent worse off than five years ago [nL03272815].

M&S shares, which lost about a quarter of their value on Wednesday, fell further on Friday, after Citi analysts slashed their price target to 205 pence from 450p.

CHALLENGING

The Citi analysts cut their earnings per share (EPS) forecasts for M&S, saying "sector-wide revenue trends will weaken further as consumer demand patterns deteriorate across both 2008 and 2009".

Citi now forecasts EPS of 33 pence for the year ending March 2009, down from 40p previously, and 26p for the year ending March 2010, down from 40.5p.

John Lewis said trading was "challenging", but that it was up against an extremely strong performance in the same week last year and its clearance sale had started well. Sales this year were up 9.7 percent on the same week in 2006-7, it said.