PREVIEW-Tesco, DSG eyed as two-tier UK Christmas unfolds

* 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.

VALUE RETAILERS SHINE

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.