* Q4 UK underlying sales up 0.1 pct; forecast down 2-4 pct
* UK non-food sales down 3.9 pct, food up 3.4 pct
* Sees 2011-12 gross profit margins flat to up 25 bps
* Sees trading conditions getting tougher
* Shares up 6.5 pct (Adds Leahy comments, updates shares)
By James Davey and Mark Potter
LONDON, April 6 (Reuters) - Marks & Spencer defied the gloom around British retailers, beating sales forecasts and winning market share with innovative products like stormproof suits, new food ranges and staples like lingerie.
Shares in Britain's biggest clothing retailer, which also sells upmarket foods and homewares, rose 6 percent after it said it had not seen the drastic fall in sales posted by others.
"Despite some of the things that we've heard ... we have not seen any dip or blip or wall. Customer confidence is low but held stable," CEO Marc Bolland told reporters on Wednesday.
His more positive tone was echoed by Terry Leahy, until last month the head of Britain's biggest retailer Tesco. On the sidelines of an industry conference, he dismissed talk of a major consumer downturn and forecast a slow and steady recovery when fuel prices stabilise.
But Bolland warned that trading would get tougher as shoppers are hit by government cutbacks, rising prices, muted wage growth and, possibly, interest rate rises.
A raft of tax rises and welfare benefit cuts came into force on Wednesday aimed at tackling the UK's record deficit.
"We see an environment out there that for the coming year will be absolutely challenging because commodity pricing is up and we know that discretionary spend will be down," he said.
M&S forecast gross profit margins would be flat to 25 basis points higher in 2011-12, as it cuts costs and improves purchasing and distribution in order to offset an expected 5 percent rise in operating expenses.
British retailers including household goods group Home Retail, electricals retailer Dixons, mother and baby goods chain Mothercare, and music and books group HMV have issued profit warnings in recent weeks, raising fears ahead of M&S's trading update.
Bolland said M&S was benefiting from the pain elsewhere.
"Instead of buying a big ticket item, people buy something that is an affordable treat but is quality," he said.
M&S's average selling prices for spring were up about 6 percent, reflecting a rise in VAT and shoppers trading up.
"People have started to buy more quality, we've seen a move from good to better to best (prices)," said Bolland, noting that innovation was increasingly key to getting shoppers to spend.
He highlighted a 70 percent jump in sales of comfort-focused Insolia high heels on the back of an advertising campaign starring model Lisa Snowdon, and a 27 percent rise in sales of Stormwear men's clothes since a campaign featuring former soccer player Jamie Redknapp was launched.
But he said the firm had also benefited from holding opening price points on key staples such as tights, selling 115,000 five-pack pairs at 2.50 pounds in its fourth quarter.
Shoppers, weary of austerity, also wanted more than ever to celebrate events like Valentine's Day and Mother's Day, he said.
Bolland highlighted sales of 500,000 "Dine in for 15 pounds" deals for Mother's Day, which augured well for trading ahead of the Easter holiday and the Royal Wedding.
M&S shares, which have lagged the STOXX Europe 600 retail index by 6 percent over the past year, were up 6.5 percent at 362.4 pence at 1330 GMT, boosting other retail stocks and valuing the firm at about 5.7 billion pounds ($9.3 billion).
"Consumers are becoming picky, and M&S's offer of affordable quality is the best for two years, in our view, driven by foods innovation and more focused buying of best sellers in clothing," said Nomura analyst Fraser Ramzan.
The 127-year-old group, which serves 21 million Britons a week from around 700 stores and has over 350 mainly franchised shops abroad, said sales at UK stores open over a year rose 0.1 percent in the 13 weeks to April 2, its fiscal fourth quarter.
While down on a 2.8 percent increase in the third quarter, that was well above analysts' forecasts for a 2-4 percent fall.
Stripping out adverse calendar effects, underlying sales were up 2.2 percent, and M&S said it gained 30 basis points of market share in non-food goods and 10 basis points in food.
Like-for-like non-food sales fell 3.9 percent, less than expected, as strong sales of menswear and lingerie helped to mitigate the negative calendar effects.
Food sales rose 3.4 percent on the same basis, helped by over 320 new products and strong sales of healthy meal brands "Count on Us" and "Simply Fuller Longer".
Bolland, who joined M&S from grocer Morrisons last year on a 15-million-pound pay deal, put innovation at the heart of a strategy plan announced in November, which also focused on revamping stores and expanding online and abroad.
On Friday the firm announced a return to France, 10 years after abandoning Western Europe. ($1=.6116 Pound) (Editing by Ben Hirschler and Will Waterman)