* FY underlying profit up 12 pct to 3.8 bln stg, as expected
* UK performance "below par," to boost innovation, marketing
* Asia profit jumps, but U.S. loss widens
* China expansion to be slower than previously expected
* Shares fall 0.9 pct vs European retail sector up 0.6 pct
(Adds more CEO comments, updates shares)
By Mark Potter
LONDON, April 19 (Reuters) - New Tesco boss Phil Clarke said the world's No.3 retailer must spruce up its products, particularly clothing, after slipping downmarket in the recession and missing profit hopes in its main UK market.
The supermarket group also unveiled a bigger-than-expected loss at U.S. business Fresh & Easy, leading some analysts to question whether it should quit the country, and missed a target to break into profit in China, saying on Tuesday it was taking longer than expected to find sites for new shopping malls.
Group profit before tax and one-off items climbed 12.3 percent to 3.8 billion pounds ($6.2 billion) in the year ended February, in line with analysts' forecasts thanks to a strong performance in Asia and proceeds from property sales.
But earnings in Britain, where Tesco accounts for almost one pound in every seven spent in shops, rose just 3.8 percent, with sales at stores open at least a year falling 0.7 percent in the final quarter, excluding fuel and VAT sales tax.
"We didn't achieve our planned (UK) growth in the year and this was only partly attributable to the deterioration in the consumer environment," said Clarke, taking a more critical line in his first results statement than his long-serving predecessor Terry Leahy, whom he succeeded in March.
"We've got a good strategy. The issues are not structural. It's about the detail," he told reporters. "We can do better and we are taking action in key areas," he added, while ruling out launching a price war.
Clarke said he would step up innovation and marketing to address a general merchandise offering grown "stale" and a clothing range that was not "on song" or "of the moment".
Shares in Tesco, which trails France's Carrefour and U.S. industry leader Wal-Mart by annual sales, were down 0.9 percent at 396.25 pence by 1330 GMT, lagging a 0.7 percent rise in the UK's benchmark FTSE-100 index.
"The most striking admission in the statement is that Tesco thinks ... (its UK performance is) not good enough," said Arden Partners analyst Nick Bubb, who also described the loss in the United States as "alarming."
CONSUMERS STRUGGLE
International retailers are increasingly relying on emerging markets for growth as shoppers in Europe and the United States struggle with austerity measures.
British groups have been particularly hard hit by a rapid government deficit reduction plan, triggering a wave of profit warnings as shoppers cut spending on discretionary goods.
"Consumers are struggling with higher taxes, higher inflation and particularly higher petrol prices. So a typical family in the UK is probably about 18 to 20 pounds a week worse off, which is equivalent to about a 7 percent increase in your basic tax rate," Finance Director Laurie McIlwee told Reuters.
Tesco, with over 5,000 stores in 14 countries, said it expected trading to remain challenging in Britain, but conditions were improving in most of its other markets.
Group sales rose 7.1 percent excluding VAT to 60.9 billion pounds, below analysts' mean forecast of 61.7 billion. Profit in Asia jumped 29.5 percent at actual exchange rates to 570 million pounds, led by Tesco's second-biggest market, South Korea.
However, U.S. losses widened 12.7 percent to 186 million pounds. Tesco said they would reduce sharply this fiscal year and it was on track for Fresh & Easy to break even late 2012-13.
Clarke said the chain had "pulled a little too much from the mainstream" and he was taking steps, like introducing fresh bread and coffee, to win over shoppers. When asked if he would commit to its long-term future, Clarke said he would take "one step at a time," while adding: "I want to give it a good run."
Clarke also said Tesco was finding it more difficult than expected to find sites for its Lifespace shopping malls in China, and expected to open around 50 over the next five years, down from an initial projection of about 80.
Tesco said its return on capital employed, a key focus as investors look for a payback on years of heavy investment, rose to 12.9 percent from 12.1 percent the year before.
Panmure analyst Philip Dorgan thought 2011-12 earnings forecasts might fall 5 percent, but kept a "buy" rating on Tesco shares due to the better returns and plans to improve in the UK.
Tesco, which makes about two-thirds of sales and profits in Britain, said capital spending would reach 4 billion pounds this financial year, up slightly from 3.7 billion in 2010-11.
It will open 11 million square feet of selling space, mostly abroad but still continuing a rapid expansion in Britain, and launch mortgages at Tesco Bank by the autumn and an Amazon-style online marketplace in late 2011 or early 2012. (Editing by Paul Hoskins and David Holmes) ($1=.6163 Pound)