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UPDATE 2-Tesco begins fight back with cost cuts and asset sales

* Troubled supermarket group to cut spending, sell assets

* Shuts pension scheme, drops dividend

* Trading improves over Christmas

* Shares up 5 percent (Adds reaction, share price)

By James Davey and Neil Maidment

LONDON, Jan 8 (Reuters) - Britain’s biggest supermarket group Tesco plans to cut hundreds of millions of pounds of costs and sell assets to fund lower prices in response to the biggest crisis in its 95-year-history.

Seeking to recover from four profit warnings and an accounting scandal, new Tesco boss Dave Lewis unveiled his strategy in a statement which also showed a marked improvement in trading over the key Christmas period.

With the company’s pension deficit and debt levels growing, Tesco said it would reduce its capital expenditure for next year to 1 billion pounds ($1.5 billion), from the 2.1 billion pounds expected this year, and cut annual costs by 250 million pounds.

It will also explore the sale of the Dunnhumby data business which powers its customer clubcard scheme, close its headquarters, not pay a final dividend and consult on a plan to close its defined benefit pension scheme to all workers.

Its shares were up 5 percent by 0825 GMT as the market welcomed initial moves by Lewis to turn the business around.

“I am very conscious that the consequences of these changes are significant for all stakeholders in our business but we are facing the reality of the situation,” Lewis said.

“There is more to do but we have taken the first important steps in the right direction.”

After two decades of uninterrupted growth in which it dominated the British retail landscape, Tesco lost its way when it became distracted by an expensive overseas expansion strategy and failed to spot the threat from discount outlets.

It was also wrong-footed by a boom in convenience stores and online shopping that took customers away from its huge out-of-town sites.

NEW UK HEAD

The raft of changes, which also include the appointment of

Halfords Chief Executive Matt Davies as the new boss of its UK and Ireland business, are the first real sign of how Lewis intends to reshape the group.

Britain’s biggest supermarket group, like rivals Asda , Sainsbury’s and Morrisons, is now losing sales at a rapid rate to German discounters Lidl and Aldi, whose limited ranges of low-priced products are increasingly popular.

Lewis took over in September, having been hired from Unilever. On Thursday he turned to another outsider to run its key domestic business -- Halford’s Davies who is widely credited with reviving the bikes to car parts retailer.

The British business, which accounts for around two thirds of revenue, is showing signs of improvement.

Like-for-like sales in the six-week Christmas period were down 0.5 percent, compared with a 4.4 percent fall in the previous three months.

“Dave Lewis has grasped the nettle and done what needs to be done,”said John Ibbotson at Retail Vision.

“The journey won’t be easy but if anyone is capable of re-establishing itself as the leading force within grocery, and the consumer champion, it is Tesco.”

The group said the steps announced on Thursday were just the start of a drive to strengthen the balance sheet and further initiatives to boost shareholder value were under consideration. It has appointed Goldman Sachs to explore options for Dunnhumby which could include a market float or a sale.

The huge savings in costs and capital expenditure will enable Lewis to cut prices in stores. Earlier on Thursday the group, Britain’s largest private sector employer, announced price cuts to hundreds of branded products.

The group also maintained its profit guidance for the 2014/15 year. ($1 = 0.6637 pounds) (Writing by Kate Holton; editing by Guy Faulconbridge)

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