Britain's Asda says sales growth shows price cuts are working

* Q2 like-for-like sales up 0.5 pct

* Says profit up in line with sales growth (Recasts, adds detail, CEO comments)

By James Davey

LONDON, Aug 14 (Reuters) - Asda, the British arm of the world's biggest retailer Wal-Mart, reported an acceleration in quarterly sales growth and hailed the improvement as proof that its price-cutting strategy is working.

Asda was the first of Britain's so called big four grocers, which also include market leader Tesco, Sainsbury's and Morrisons, to counter the threat posed by discounters Aldi and Lidl by cutting its own prices.

The company said in November that it would spend 1 billion pounds ($1.67 billion) on lowering prices over the next five years.

Sales at Asda stores open for more than a year, excluding fuel, rose 0.5 percent in the 10 weeks to June 30, the grocer's financial second quarter, versus the same period last year - an improvement on first-quarter like-for-like sales growth of 0.1 percent.

Asda's market share improved by 14 basis points, while it increased profit in line with sales growth. Its online sales rose by more than 20 percent.

"What's clear from our performance from a market share perspective and our comp (like-for-like sales) position is that we are differentiating ourselves now from the other big three retailers," Chief Executive Andy Clarke told reporters.

Tesco, Morrisons and Sainsbury's have all posted sales dips in their most recent updates. Tesco and Morrisons have also issued profit warnings, with the former also parting company with its chief executive.

COST-CONSCIOUS MARKET

Clarke noted levels of disposable income were very different in London to regions such as the north east of England and Northern Ireland.

"If you're a family on a budget in those difficult regions it still feels very challenging. There is undoubtedly a two-stage (economic) recovery," he said.

"We're very mindful of that, which is why our strategy around value is working."

Pledges to cut prices have also come from Tesco and Morrisons, while Sainsbury has vowed to remain competitive, raising analysts' concerns about a possible price war hitting margins and earnings across the industry.

The overall UK grocery market grew by 0.9 percent in the 12 weeks to July 20, the lowest figure for 10 years, according to data published by Kantar Worldpanel last month.

British consumers are shopping around for the best prices, buying little and often and wasting less, increasingly opting for convenience stores or online shopping.

The Bank of England gave a generally upbeat quarterly economic update on Wednesday, with upgrades to the growth outlook for this year and next, lower unemployment and inflation remaining just below its 2 percent target.

However, data showed that average wages in Britain fell for the first time in five years during the three months to June.

Separately on Thursday, Wal-Mart cut its full-year profit forecast, citing higher employee healthcare costs and increased investment in its online business. ($1 = 0.5993 British Pounds) (Editing by Sophie Walker and David Goodman)