UPDATE 2-Next says UK recovery not yet sustainable

* 2013-14 pretax profit 695.2 mln stg, up 12 pct

* Profit greater than that forecast for Marks & Spencer

* Sales 3.74 bln stg, up 5.4 pct, driven by Directory

* Forecasts 2014-15 sales up 4-8 pct, profit up 5-11 pct

* Shares rise 2 pct (Recasts with CEO, analyst comment, shares)

By James Davey

LONDON, March 20 (Reuters) - Britain's economic recovery isbeing driven by an unsustainable pick up in consumer borrowingwhich could be derailed by higher interest rates, according tothe head of retailer Next, a prominent supporter of the primeminister's Conservative Party.

Simon Wolfson made his comments as Next, Britain'ssecond-biggest clothing retailer, reported a 12 percent rise inannual profit to 695.2 million pounds ($1.2 billion), driven bybooming sales at its online business - a figure likely to topthat of rival Marks & Spencer for the first time.

Data and surveys have shown an improving outlook for UKconsumer spending, which generates about two thirds of grossdomestic product. But some retailers remain wary.

"Whilst the economy is getting better, we need to recognisethat last year's growth was driven very much by credit and thatthat can't go on forever," Wolfson told Reuters on Thursday.

"Until we see significant increase in the supply side of theeconomy - profitable investment and improved productivity - wecannot bank on a return to sustained growth," he said.

Wolfson, who sits in Britain's upper house of Parliament,said he was encouraged by recent data showing little or nodecline in real earnings. But he was concerned by the prospectof an interest rate rise later this year dampening the consumereconomy as well as house price inflation getting out of control.

"My big concern is, particularly in the south east (ofEngland) where people have borrowed a lot of money on theirhomes, is that people have got used to very low interest ratesand any rise in interest rates will come as something of ashock," he said, adding: "Asset bubbles are never productive."

Espirito Santo Investment Bank analyst Tony Shiret reckonsNext, which also sells homewares, is the UK clothing retailermost exposed to customers with mortgages.

"This is clearly a risk that should be discounted in someway. Yet we get no sense that this is on the investmentwatch-list for this company," he said.

On Wednesday, UK finance minister George Osborne deliveredhis annual budget, courting voters ahead of a national electionin 2015 with promises of help for savers, tax breaks formanufacturers and lower beer and bingo levies.

MORE PROFIT THAN M&S

Shares in Next, which have risen 61 percent over the lastyear, were up 2 percent to 6,705.25 pence at 1045 GMT, valuingthe company at about 10.4 billion pounds.

The firm trades from over 500 stores in Britain and Irelandand almost 200 stores in more than 30 countries overseas, aswell as via the Directory internet and catalogue business.

Its pretax profit of 695.2 million pounds for the year endedJanuary 2014 compares with Next's own guidance of between 684and 700 million pounds, analysts' consensus forecast of 695million and 621.6 million made in the 2012-13 year.

Sales, excluding VAT sales tax, rose 5.4 percent to 3.74billion pounds, driven by new space and online growth. Directorysales grew 12.4 percent, while store sales rose 1.7 percent.

Analysts expect Marks & Spencer, Britain's biggest clothingretailer, to make a pretax profit of 628 million pounds in its2013-14 financial year.

Next's underlying earnings per share (EPS) rose 23 percentto 366 pence, boosted by share buy-backs and its dividend wasincreased 23 percent to 129 pence - a fifth straight year thatEPS and dividend have grown by over 15 percent.

The firm forecast sales growth of 4-8 percent in its 2014-15year, with pretax profit rising 5-11 percent to 730-770 millionpounds and total shareholder returns of 10-16 percent.

Next paid a 50 pence a share special dividend in January andwill pay another of the same amount in May. It has pledged todistribute surplus cash through special dividends as long as itsshare price remains above 6,245 pence. If it falls below thatfigure the firm may revert to a share buyback programme.

($1 = 0.6014 British Pounds) (Editing by Kate Holton and Mark Potter)