* Underlying sales up 2.9% in last 3 months, forecast 1.5-3%
* Says consumer environment to remain challenging
* Non-food sales growing three times the pace of food sales * Online sales up 25%; new stores beating expectations
* Shares dip 1% after recent rises
(Adds finance director's comments, more detail, updates shares)
By Mark Potter
LONDON, Oct 6 (Reuters) - J Sainsbury, Britain's No.3 grocer, posted quarterly sales at the top end of forecasts on Wednesday as new stores, online shopping and demand for premium and non-food products helped it grow market share.
The group, which trails market leader Tesco and Wal-Mart's Asda in terms of annual sales, said it expected conditions to stay difficult for shoppers as the government raises taxes and reduces spending to cut debt.
However, Chief Executive Justin King said the government's austerity drive would not necessarily hit demand further.
"We think, very largely, the customer has dialled into their behaviour the expectation of that bad news," he told reporters, pointing to recent surveys that have shown shoppers becoming more pessimistic about the future.
King also said he did not see a big rise in grocery prices despite a survey on Wednesday that showed UK food price inflation climbing at its fastest rate since June 2009.
Sainsbury's cautious outlook on consumer behaviour was echoed by British retail baker Greggs on Wednesday while chocolate retailer Thorntons reported a drop in underlying sales at its own stores.
Sainsbury, with over 525 supermarkets and 300 convenience stores, said second-quarter sales at stores open at least a year rose 2.9 percent excluding vehicle fuel sales but including VAT sales tax.
"PRETTY IMPRESSIVE"
That is up from 1.1 percent in the first quarter and compares with the average forecast of 2.3 percent in a Reuters poll of eight analysts.
It is also above the 1.2 percent increase reported on Tuesday by Tesco for the 26 weeks to Aug. 28.
"Pretty impressive," said Arden Partners analyst Nick Bubb, predicting small upgrades to full-year profit forecasts.
Sainsbury's finance director John Rogers said he thought the consensus forecast by analysts for a full-year profit of just under 655 million pounds ($1 billion) might rise by about 5 million.
However, RBS analyst Justin Scarborough said much of the good news was already priced into Sainsbury's shares which have risen more than 20 percent this year.
At 0940 GMT the shares, which have outperformed the STOXX Europe 600 retail index by 11 percent this year, were down 1 percent at 385.5 pence.
"Whilst today's evidence is that the sales performance has been industry-leading, this looks fully discounted in a 20 percent sector premium (for the share price)," said Liberum analyst Simon Dunn.
Sainsbury's shares trade at 15.8 times forecast earnings, above rivals Tesco and Wm Morrison on 13.3 and 13.2 respectively, according to Reuters data.
INFLATION
King said higher food prices contributed just over 1 percentage point to underlying growth in the last three months and that while inflationary pressures appeared to be rising, he did not see a significant increase in the months ahead.
Sainsbury, which is expanding into convenience stores, online and non-food ranges, said total sales rose 6.6 percent in the 16 weeks to Oct. 2.
While demand was held back by higher road fuel prices, the group said new stores were performing ahead of its expectations, non-food sales were growing at three times the rate for food, led by childrenswear, and online sales were up over 25 percent.
It also said its relaunched premium "Taste the Difference " range had been well received by shoppers, adding to signs that Britons are focusing on quality despite the economic pressures. Clothing and upmarket food retailer Marks & Spencer posts second-quarter sales figures on Thursday.
CHINA
King said Sainsbury was continuing to look at a potential entry into China, but signalled any move was a long way off.
"They're (the Sainsbury's team in China) doing no more than looking at what the opportunity is. That'll take a good while even to think about," he told reporters."
"It's one of those things that people have got a bit excited (about) long before time." (Editing by Greg Mahlich) ($1=.6281 pounds)