The supermarket group, which accounts for about one in every 10 pounds spent in British shops and makes over 70 percent of its trading profit there, said UK consumers were being careful with their spending as disposable income continued to fall and economic worries persist.

"Confidence isn't getting any worse but it isn't getting any better. The great hope would be that fuel prices are going to come down," Chief Executive Philip Clarke told reporters.

"A (car) tank of petrol is still 70 pounds ($110) now and it was 40 pounds two years ago, an amazing dent in household budgets."

Tesco said sales at British stores open over a year, excluding fuel and VAT sales tax, fell 1.5 percent, in the 13 weeks to May 26, its fiscal first quarter, in line with analysts' expectations.

That was marginally better than a 1.6 percent decline in the fourth quarter of its previous financial year, despite a tough comparative period when sales were boosted by a royal wedding.

Clarke said Tesco's performance improved relative to the market, with total UK sales down 0.3 percent to 2.0 percent versus a decline in market growth of 1.3 percent, according to Kantar data.

He added that the firm saw its biggest ever week for sales outside a Christmas period in the run-up to the four-day Queen's Diamond Jubilee holiday weekend at the beginning of June, with over 1 billion pounds in sales. That will be included in second-quarter results.

"Had it been in the (first) quarter it would have been substantially better for us in our reporting," said Clarke, noting the grocer sold nearly 1 million packs of party and picnic food and nearly 2 million sausage rolls.

But he said the UK supermarket sector remained very competitive through the first quarter, with a significant amount of couponing activity.

Tesco shares, which have lagged the STOXX Europe 600 retail index .SXRP by 27 percent this year, were up 0.4 percent at 304 pence at 0755 GMT, valuing the group at 25 billion pounds.

"We see this as a steady statement suggesting stabilization is coming through in the UK. For the ‘uber bears' there is no warning, which is an important foundation to the rebuilding of Tesco's investment credentials," said Shore Capital analyst Clive Black.

CUSTOMERS LIKE WHAT THEY SEE

Once one of the most consistent British companies in terms of earnings growth, Tesco stunned investors in January with its first profit warning in over 20 years, saying it needed to invest heavily to stem a steady decline in UK market share.

In April Clarke, a Tesco career lifer who as a youth stacked shelves in his local store, slashed expansion plans for the British chain and said he would spend over 1 billion pounds on improving stores and online shopping in a bid to reverse the decline in market share.

He said on Monday his plan was making progress, with extra staff put in 700 of its stores and an Everyday Value range relaunched.

"Our customers are seeing the evidence of the changes we're making and they're telling us they like what they see," he said.

But he declined to say how long it would take for a significant improvement in like-for-like sales to be seen.

Tesco, with over 6,000 stores in 14 countries, said total first quarter sales rose 2.2 percent including fuel.

The group won market share in 11 of its 12 international markets, though in the United States its loss-making Fresh & Easy chain saw a moderation in its like-for-like sales growth.

"At this early stage of the year we are performing in line with market expectations for the group. The outlook for the year as a whole remains unchanged," it added. ($1 = 0.6486 British pounds)

(Writing by Mark Potter, Editing by Rhys Jones, Greg Mahlich)

• A Permanent Economic Emergency