* Q3 UK like-for-like sales, ex fuel and VAT, down 1.5 pct
* Blames sales fall on weak overall market
* Like-for-like sales decline in all overseas markets
* Says on track to meet analyst FY forecasts as of Nov. 8
* Shares dip 1.1 pct
By James Davey
LONDON, Dec 4 Tesco's sales fell in Britain and abroad in the third quarter, casting fresh doubt over Chief Executive Philip Clarke's 1 billion pound ($1.6 billion) effort to reinvigorate the world's third-biggest retailer.
The company, which trails France's Carrefour and U.S. giant Wal-Mart in annual sales, blamed a weaker UK market for the fall. It said it was focusing on the long term and would not be drawn into a price war.
Tesco aims to dominate a new multi-channel era - selling a range of goods from bread to clothing and banking products from its supermarkets and online, rather than slashing food prices to win market share from rivals such as Wal-Mart's Asda.
The company, which makes about two thirds of its revenue in Britain, is 20 months into the UK turnaround plan and is pouring investment into store upgrades, extra staff, new product ranges and price initiatives.
"It looked like Philip Clarke's billion-pound turnaround plan was beginning to work but today's 1.5 percent fall in UK like-for-like sales will call this into question," said John Ibbotson, director of retail consultants, Retail Vision. "This, together with declining sales in key overseas markets, will put Clarke and his senior management team under threat."
Tesco's recent share performance suggests some investors have given up waiting. After trading mostly in line with Britain's FTSE 100 index since the start of the year, the stock decoupled from the benchmark in early September and is now largely unchanged on the year, with the FTSE up 11 percent.
"My feeling is that probably they're doing the right thing," said a Tesco institutional shareholder who declined to be named. He said management deserved more time to deliver results. "It's such a large company and a fairly big problem so it's difficult for the management to have a quick fix."
Tesco shares were down 1.1 percent at 337.7 pence at 1226 GMT.
The company said it was performing in line with market expectations for its 2013-14 year, referring to a consensus forecast published on its website on Nov. 8. Since then, analysts including Tesco's corporate brokers, Deutsche Bank and Barclays, have downgraded their forecasts.
Management has not given a deadline for completing the revamp, saying there will be no immediate payback from a project that will reposition the company for the next decade. Clarke said the plan "is very much on track".
"For us it isn't about market share over a quarter or a half. It's about delivering a business which is sustainable," Clarke told reporters on Wednesday.
Some retail industry experts believe Tesco's overhaul should have boosted top-line growth by now.
Analysts have suggested Tesco should cut prices to reclaim lost market share, even if it means sacrificing some profitability for now. The company is determined to sustain a UK operating margin of 5.2 percent.
Clarke said the margin "isn't holding us back" and that he was comfortable with it.
Sales at British stores open over a year, excluding fuel and VAT sales tax, fell 1.5 percent in the 13 weeks to Nov. 23. That was in line with analyst forecasts of a fall of 1-2 percent but represented a deterioration from flat like-for-like sales in the second quarter.
Tesco, in common with Britain's three other major grocers - Asda, J Sainsbury and Wm Morrison - is being squeezed by hard discounters Aldi and Lidl and upmarket grocers Waitrose and Marks & Spencer.
Last month market research group Kantar Worldpanel said all the "big four" were losing share for the first time in over a decade, while Aldi's share was at a record high.
Clarke said the rise of the discounters was largely driven by new store openings, something Tesco had pulled back on as it would not deliver long-term returns.
Overseas markets that once provided a hedge against weakness at home were more of a hindrance in the third quarter, with like-for-like sales down in all nine of the markets Tesco detailed on Wednesday for a second straight quarter.
That included a 4.8 percent decline in South Korea, Tesco's biggest overseas market, hit by regulatory restrictions on opening hours, a 6.9 percent fall in Thailand where the economy weakened and an 8.1 percent slump in Ireland.
Investors expect Tesco's earnings to fall this year. As of Nov. 8, the consensus analyst forecast for group trading profit in 2013-14 was 3.39 billion pounds, down from 3.45 billion pounds in 2012-13.