UPDATE 3-Tesco's problems mount as UK sales resume decline

* 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 (Reuters) - Tesco's sales fell inBritain and abroad in the third quarter, casting fresh doubtover Chief Executive Philip Clarke's 1 billion pound ($1.6billion) effort to reinvigorate the world's third-biggestretailer.

The company, which trails France's Carrefour andU.S. giant Wal-Mart in annual sales, blamed a weaker UKmarket for the fall. It said it was focusing on the long termand would not be drawn into a price war.

Tesco aims to dominate a new multi-channel era - selling arange of goods from bread to clothing and banking products fromits supermarkets and online, rather than slashing food prices towin market share from rivals such as Wal-Mart's Asda.

The company, which makes about two thirds of its revenue inBritain, is 20 months into the UK turnaround plan and is pouringinvestment into store upgrades, extra staff, new product rangesand price initiatives.

"It looked like Philip Clarke's billion-pound turnaroundplan was beginning to work but today's 1.5 percent fall in UKlike-for-like sales will call this into question," said JohnIbbotson, director of retail consultants, Retail Vision. "This,together with declining sales in key overseas markets, will putClarke and his senior management team under threat."

Tesco's recent share performance suggests some investorshave given up waiting. After trading mostly in line withBritain's FTSE 100 index since the start of the year,the stock decoupled from the benchmark in early September and isnow 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'ssuch a large company and a fairly big problem so it's difficultfor the management to have a quick fix."

Tesco shares were down 1.1 percent at 337.7 pence at 1226GMT.

The company said it was performing in line with marketexpectations for its 2013-14 year, referring to a consensusforecast published on its website on Nov. 8. Since then,analysts including Tesco's corporate brokers, Deutsche Bank andBarclays, have downgraded their forecasts.

Management has not given a deadline for completing therevamp, saying there will be no immediate payback from a projectthat will reposition the company for the next decade. Clarkesaid the plan "is very much on track".

"For us it isn't about market share over a quarter or ahalf. 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.

PRICE CUTS?

Analysts have suggested Tesco should cut prices to reclaimlost market share, even if it means sacrificing someprofitability for now. The company is determined to sustain a UKoperating margin of 5.2 percent.

Clarke said the margin "isn't holding us back" and that hewas comfortable with it.

Sales at British stores open over a year, excluding fuel andVAT sales tax, fell 1.5 percent in the 13 weeks to Nov. 23. Thatwas in line with analyst forecasts of a fall of 1-2 percent butrepresented a deterioration from flat like-for-like sales in thesecond quarter.

Tesco, in common with Britain's three other major grocers -Asda, J Sainsbury and Wm Morrison - is beingsqueezed by hard discounters Aldi and Lidl and upmarket grocers Waitrose and Marks &Spencer.

Last month market research group Kantar Worldpanel said allthe "big four" were losing share for the first time in over adecade, while Aldi's share was at a record high.

Clarke said the rise of the discounters was largely drivenby new store openings, something Tesco had pulled back on as itwould not deliver long-term returns.

Overseas markets that once provided a hedge against weaknessat home were more of a hindrance in the third quarter, withlike-for-like sales down in all nine of the markets Tescodetailed on Wednesday for a second straight quarter.

That included a 4.8 percent decline in South Korea, Tesco'sbiggest overseas market, hit by regulatory restrictions onopening hours, a 6.9 percent fall in Thailand where the economyweakened and an 8.1 percent slump in Ireland.

Investors expect Tesco's earnings to fall this year. As ofNov. 8, the consensus analyst forecast for group trading profitin 2013-14 was 3.39 billion pounds, down from 3.45 billionpounds in 2012-13.