UPDATE 2-UK retail sales plunge, inflation outlook crumbles

* UK retail sales plunge in run-up to key Christmas period

* UK inflation expectations crumble as recession looms

* UK consumer confidence holds above recent record low

By Christina Fincher and David Milliken

LONDON, Nov 28 (Reuters) - British retail sales plunged in November at their joint-fastest pace since records began 25 years ago while a growing number of Britons predicted prices would fall, not rise, next year.

The downbeat tone of the Confederation of British Industry's quarterly sales survey chimed with a barrage of gloomy news from individual retailers as expectations for inflation tumbled, giving shoppers a further incentive to delay purchases.

Flagship department store John Lewis reported weekly sales down 13 percent on a year ago, and both retailer Woolworths and furniture chain MFI have called in administrators this week.

"The sharp drop in November's CBI survey confirmed anecdotal evidence that the past few weeks have been dreadful for most retailers," said Vicky Redwood at Capital Economics.

A survey from pollsters GfK NOP showed British consumer confidence rose unexpectedly in November, but remained not far from August's record low.

Analysts said the reading, which chimed with increases in German and French consumer confidence indicators earlier this week, may well have been driven by relief over falling petrol and food prices.

The Confederation of British Industry's distributive trades survey balance slid to -46 from -27 in October, much worse than the drop to -35 which economists had forecast. The index was last this low in August, which was the weakest reading since the series began in 1983.

A separate survey from YouGov/Citi showed Britons' expectations of the rate of inflation over the next 12 months tumbled to a series low of 0.9 percent in November, with more than a quarter of respondents reckoning prices would actually fall over the next year.

"The risk is that we turn to deflation," said Nick Bubb, retail analyst at Pali International. "People will hold off spending because they think prices will fall further and that's not a pretty picture."

MORE RATE CUTS AHEAD

The dire retail sales figures and sharp drop in inflation expectations encouraged investors to bet the Bank of England would make another dramatic cut in interest rates next week. The December gilt future gained 5 ticks shortly after the CBI survey while short sterling futures extended gains to stand as much as 8 ticks higher across the strip.

Economists polled by Reuters [BOE/INT] are split between those expecting a half percentage point cut to 2.5 percent, and a large minority seeing a cut of a full percentage point following November's 1.5 percentage point reduction.

"We are starting to see large rises in unemployment, and households are very worried about the outlook for the economy, so they just don't want to spend," said Matthew Sharratt, UK economist at Bank of America.

The CBI survey suggested that no recovery in consumer spending was likely anytime soon.

The sales expectations balance for December fell to -40, just a whisker above from the survey low of -42 hit in September. Falling confidence crushed investment intentions, with a net 57 percent of firms planning to cut expenditure, the weakest reading since records began in 1983.

The CBI survey showed sectors linked to the housing market suffered particularly badly. House prices, an important driver of British consumer sentiment, are around 15 percent down from last year. Only footwear and leather showed any sales growth.

"Big-ticket items like consumer durables, furniture, carpets and DIY are really being hit, and with a soaring of the housing market remote, this is unlikely to change," said Andy Clarke, chairman of the CBI's survey panel.

* For a table of the data, double-click on [ID:nLAC003067] (Additional reporting by Rachel Armstrong; editing by John Stonestreet)