Retail sales volumes were stagnant on the month to give an annual rise of just 0.9 percent, the Office for National Statistics said on Thursday - below economists' forecasts for both monthly and annual sales growth.

The figures follow a shock fall in retail sales in October and suggest underlying weakness in much of Britain's services sector, raising the likelihood the economy will shrink in the fourth quarter, something the Bank of England views as likely.

"Consumers are still keeping their powder dry," said Peter Dixon, UK economist at Commerzbank. "Fourth-quarter activity as a whole is going to be fairly weak ... A negative (GDP) figure can't be ruled out," he added.

October services data due on Friday will give the first clear glimpse of the health of the largest sector of Britain's economy in the final quarter of 2012.

Britain emerged from its second recession since the financial crisis in the third quarter of this year, and the economy faces headwinds from the euro zone crisis, government spending cuts and relatively high inflation.

The one bright spot for retail sales was in household goods stores, where volumes rose by 3.8 percent on the month, the biggest jump since February 2010. The ONS said this was driven by electricals such as Apple's (AAPL.O) new iPad Mini tablet computer.

WEAK SPENDING

Consumer spending, which drives about two thirds of British GDP, has still not recovered to the levels seen before the 2008-09 recession, as stubborn inflation has outpaced wage growth.

A number of well-known British high-street stores have ceased trading this year, including JJB Sports, Clinton Cards and Game Group. The latest failure, 235-store electrical chain Comet, shut its doors on Tuesday.

The key Christmas trading period got off to a weak start, with retail sales growing less than expected in the first half of December, according to a survey by the Confederation of British Industry.

However, some retailers are bucking the trend.

John Lewis JLP.UL, Britain's biggest department store group, reported record weekly sales for a second straight week.

The ONS said retail sales excluding fuel rose 0.1 percent on the month in November and were 2.0 percent higher than a year ago, compared to economists' forecast for a 0.4 percent increase on the month and a 2.3 percent rise on the year.

Automotive fuel sales were 8.8 percent lower than a year earlier, the biggest decline since October 2010.

Investec economist Philip Shaw said that the 2 percent rise in retail sales excluding fuel marked an improvement on 2011, helped by the high number of Britons in work.

However, with wages failing to keep up with inflation - which held at 2.7 percent in November, the highest rate since May - many Britons are feeling the pinch.

Rising food prices were a major source of high inflation in November, and Thursday's data showed that food sales volumes dropped 0.1 percent on the month, partly as a result.

The pressure on Britons' incomes is unlikely to ease anytime soon, as Bank of England policymakers said on Wednesday that inflation would probably exceed 2 percent in the next year, with further upward risks from higher food prices.

(Reporting by David Milliken and Olesya Dmitracova; Editing by Susan Fenton)

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