* Q3 underlying sales up 1.3 percent, vs forecast up 1.2-1.5 percent
* Total sales up 2.8 percent ex-fuel, up 4.7 percent including fuel
* Consumer environment tough, full-year outlook unchanged
* Sees H2 food price inflation 2-3 percent, no big hike in 2011
* Shares down 1 percent, underperforming European retail index
(Adds FD, analyst comments, shares, detail, background)
By Mark Potter
LONDON, Nov 4 (Reuters) - Wm Morrison Supermarkets said it expected shoppers to remain under pressure into the second half of next year, as it met forecasts with a 1.3 percent rise in third-quarter underlying sales.
However, Britain's fourth-biggest grocer played down fears of a surge in food prices, saying on Thursday it did not see big inflationary pressures and consumers were offsetting the impact of rising prices by buying more goods on promotion.
Britain's retailers are worried that tax hikes and public spending cuts aimed at reducing government borrowing could hit spending in the coming months, and that they might struggle to pass on rising input prices to cash-strapped shoppers.
"We think through until really the second half of 2011, people will be very focused on value," Morrison's finance director Richard Pennycook told reporters.
Morrison's, which runs over 430 stores and, unlike major rivals, produces much of the food it sells, said sales at stores open over a year rose 1.3 percent, excluding petrol and VAT sales tax, in the 13 weeks to Oct. 31, its fiscal third quarter.
That was up from 1 percent in the second quarter, helped by a small increase in food prices, and compares with analysts' average forecast of 1.4 percent in a Reuters poll of 11.
"We had hoped for a bit more than that ... Morrison's will need to do better in the key fourth quarter to meet our second-half forecast of over 2 percent like-for-like sales growth," said Arden Partners analyst Nick Bubb.
At 0820 GMT Morrison's shares were down 1.7 percent at 285.1 pence, lagging a 0.3 percent rise on the STOXX 600 European retail index. The stock has underperformed that index by 5 percent this year.
LOYALTY, INFLATION
Morrison's has beaten sales growth at bigger rivals Tesco Wal-Mart's Asda and J Sainsbury in recent years as it recovered from the botched acquisition of Safeway in 2004 and customers responded to its mix of low prices, fresh food counters and innovative promotions.
But it has recently slipped behind Sainsbury, hit by a steeper economic downturn in its heartlands in northern Britain and by a trend towards affordable luxury foods, which has favoured more premium players.
Some analysts are also concerned that Morrison's lacks the diversity of its rivals, although new chief executive Dalton Philips announced plans in September to test convenience stores and selling over the Internet next year.
Pennycook said Christmas would be tough, but still expected Britons to treat themselves with premium goods and party food.
He was also confident the group's collector card loyalty scheme, which has helped to drive strong Christmas sales growth in recent years, would stand up well to the challenge of a new voucher programme from Asda.
Morrison's was comfortable with analysts' full-year consensus profit forecast of about 860 million pounds, he added.
A survey on Wednesday showed British food price inflation at a 16-month high of 4.4 percent in October.
However, Pennycook forecast inflation over the second half of the group's financial year would be around 2-3 percent, and played down fears of further big increases in 2011.
"We don't see a big wall of inflationary pressure coming," he said on a conference call. (Editing by James Davey and Will Waterman)