* Q1 underlying sales up 2.5 percent, vs forecast 1 percent
* Sales boosted by Easter, royal wedding, good weather
* Trading likely to get tougher again in coming months * Shares up 0.9 percent vs European retail sector down 0.3 percent
(Adds company, analyst comments, detail, background, shares)
By Mark Potter
LONDON, May 5 (Reuters) - Promotions and a surge in spending on bunting and picnics around Easter and the royal wedding helped Wm Morrison Supermarkets beat quarterly sales forecasts and counter a tough consumer backdrop.
Britain's fourth-biggest grocer said on Thursday tougher trading months earlier in the year were more indicative of likely trends going forward as shoppers grapple with rising prices and austerity measures.
"We are really pleased with quarter one. But it will get tougher again now as we go through the next few months," finance director Richard Pennycook told reporters.
Sales at stores open over a year rose 2.5 percent, excluding petrol and VAT sales tax, in the 13 weeks to May 1.
That was up from 0.3 percent growth the quarter before, helped by the inclusion of shops bought from rival the Co-Op in 2009, and against an average forecast rise of 1 percent in a Reuters poll.
"A late Easter, having a royal wedding and good weather were three nice tailwinds," chief executive Dalton Philips said on a conference call.
Sales were boosted by promotions, such as Morrison's "Fuel Britannia" campaign which offered customers 6 pence off the price of a litre of petrol if they spent 40 pounds in stores, the group said.
It sold over 100 miles of bunting in the run up to the royal wedding, including that used to decorate the party outside the residence of the prime minister in Downing Street.
Demand for champagne, ready meals, ice cream and picnic foods surged as well, while sales of rubbish bags leapt 30 percent as Britons tidied up after their celebrations.
"Morrisons has regained the momentum it looked like it might be losing late last year," said Evolution analyst Dave McCarthy, keeping an "add" rating on the shares and a 325 pence target.
At 0850 GMT, the shares were up 0.8 percent at 302.7 pence, outperforming a 0.4 percent decline on the STOXX Europe 600 retail index.
OUTPERFORMING
Retailers have been struggling as shoppers are squeezed by rising prices, subdued wages growth and government cutbacks. An industry survey on Tuesday showed store groups planning for a weak May after a better-than-expected April.
"The first couple of months (of the financial year) were harder yards (than April) and they are more indicative we think of the rest of the year," Pennycook said.
Morrison, which runs around 440 stores and unlike rivals produces much of the food it sells, has been performing better than its main competitors in recent months, thanks in part to its lower exposure to discretionary non-food ranges.
Tesco, Britain's biggest retailer, reported a 0.7 percent drop in underlying UK sales for the last quarter of its financial year ended February, while J Sainsbury posted an increase of about 0.2 percent for the 10 weeks to March 19.
Morrison shares have beaten the STOXX Europe 600 retail index by 9 percent this year. But they trade at a discount to many peers as a multiple of forecast earnings because of the company's lack of exposure to faster-growing foreign markets and formats like convenience stores and the internet.
Morrison is due to open its first convenience stores later this year, and in March took a 10 percent stake in U.S. online grocer FreshDirect, following its purchase of baby goods website Kiddicare in February.
Total fist-quarter sales, including petrol, rose 7.3 percent, Morrison said. (Editing by Paul Hoskins and Andrew Callus)