* To cut prices of over 3,000 staple products from Monday
* Cuts funded by cost savings, changes to loyalty scheme
* To rein in promotions, focus more on own-brand goods
* Analysts see pressure on Sainsbury, Ocado, but no price war
* Tesco shares fall 2 pct, outperforming European retail sector (Adds Sainsbury's comment)
By Mark Potter
LONDON, Sept 22 (Reuters) - Tesco , the world's No.3 retailer, said it is investing more than 500 million pounds ($780 million) cutting prices in Britain as it tries to win back cash-strapped shoppers.
The supermarket group, which takes more than one in every ten pounds spent in British shops, said on Thursday it would cut the price of over 3,000 staple products, including milk, bread, fruit and vegetables, from Monday.
"This is a repositioning of price at Tesco," UK chief executive Richard Brasher told reporters, adding it was the biggest investment he had made in lowering prices in 25 years at the business.
The move underscores the weakness of consumer spending in Britain, where shoppers are economising on everything from clothes to groceries as disposable incomes are squeezed by rising inflation, subdued wage growth and austerity measures.
"Families are having to cut back on the staples, not just the extras," Brasher said, adding he was not assuming any improvement in trading conditions anytime soon.
It will also add to the pressure on an embattled industry, where many players benchmark their prices to the market leader.
ING analysts said J Sainsbury and online grocer Ocado were likely to suffer most because they have less financial leeway to respond than rivals such as Wal-Mart's Asda and Wm Morrison .
Tesco shares closed down 2.1 percent at 356.25 pence, outperforming a 4.2 percent drop on the STOXX 600 European retail index . Sainsbury's stock ended down 4 percent, Ocado down 6.2 percent and Morrisons down 2.5 percent
MARKET SHARE
Brasher said the price cuts had been planned for six months and were largely funded by cost savings and by reducing the benefits of the group's Clubcard loyalty scheme, reassuring analysts that profit margins would not be sacrificed.
"Largely being self-funded, the initiative should at least be neutral for earnings to our minds, and if it does build volume and share, it could be more than self-financing," said Shore Capital's Clive Black.
However, Black added that cutting mainly grocery prices would not solve Tesco's problems, as it needed to improve its non-food business as well. It was also important Tesco did not weaken its appeal to more affluent shoppers, he said.
Tesco has been leaking market share for over three years as rivals have upped their game and its broad appeal has been challenged by trends towards both low-priced staples and premium foods as shoppers eat out less and cook more at home.
The group's UK grocery market share dipped to 30.4 percent in the 12 weeks to Sept. 4 from 30.8 percent the year before, according to market research firm Kantar Worldpanel, though that is still far ahead of second-placed Asda's 17.4 percent.
Tesco, which relies on Britain to contribute about two-thirds of sales and profits, said it would cut the number of multibuy promotions and in four weeks time reduce the reward points on its Clubcard loyalty scheme.
"We're giving customers a more straightforward shop -- reducing the number of promotions and putting the emphasis on clear and reliable savings that everyone can benefit from," Brasher said.
Bernstein analyst Chris Hogbin said the strategy was a positive development, but the magnitude of the investment -- equivalent to 1.2 percent of UK revenues in fiscal 2010-11 -- did not represent a major step-up in competitive intensity.
Asda dismissed the cuts and kept its price guarantee which offers to refund customers the difference via a money-off voucher if it is not at least 10 percent cheaper than rivals.
A Sainsbury's spokesperson said: "This is classic smoke and mirrors from Tesco, giving with one hand and taking with the other. Removing double Clubcard points will save Tesco 350 million pounds."
Tesco said it would focus most of the investment on more than 1,000 own-label products, turning up the heat on branded goods manufacturers.
($1 = 0.641 British Pounds) (Editing by Paul Sandle and Elaine Hardcastle)
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