* Coles sees price deflation moderating as fruit, vegetable prices rise
* Coles head says consumer sentiment still down vs year ago
* Bunnings Q1 same-store sales up 2.5 pct, Target down 4.1 pct (Adds details, quotes)
MELBOURNE, Oct 25 (Reuters) - Australia's Wesfarmers Ltd said like-for-like sales at its Coles supermarkets grew 3.7 percent in its fiscal first quarter as a long-running price war enticed cost-conscious shoppers and boosted sales volumes.
That beat average market forecasts for 3.4 percent growth, according to a Reuters survey of six analysts, and compared with growth of 2.3 percent at top rival Woolworths Ltd.
Australian retailers in general have been forced to deeply discount and accept shrunken profit margins as consumers respond to economic uncertainty and falling home and share market values by freezing spending.
"Our customers are as focused on value now as they have ever been, with consumer sentiment still slow to recover to levels seen last year," said Coles Managing Director Ian McLeod.
The retail-to-coal company said food-and-liquor price deflation was 3.2 percent in the first quarter, driven by a price war as Coles competes with Woolworths.
Both chains, which control over 70 percent of the grocery market, have slashed the cost of basic items such as food, milk and meat to win foot traffic.
Coles, which has now had food and liquor price deflation for 12 of the last 13 quarters, said a rise in fresh produce prices would slow price deflation through the course of the year.
First-quarter sales at Wesfarmers' home improvement chain Bunnings rose 2.5 percent at stores open more than a year, while discounter Target saw same-store sales fall 4.1 percent as it reduced the price of toys.
Discounter Kmart had a 2.2 percent increase in sales.
"We like the effort in Coles but think the turnaround in Target is taking too long," said Peter Esho, analyst at Citi Index.
"We think the share price will struggle to maintain a rally above A$35 per share until the other pieces of the pie fall into place."
The stock closed Wednesday at A$34.60, off a March low of A$28.25.
In its coal business, Wesfarmers agreed an average 26 percent drop in prices for its metallurgical coal exports as a slowdown in demand from Asian buyers bites.
Wesfarmers said the average contract price for its Curragh hard coking coal would be $160 per tonne, free-on-board in the December quarter, versus $220 per tonne in the September quarter. (Reporting by Miranda Maxwell; Editing by John Mair)