UK's Asda says rivals' use of discount vouchers unsustainable

* Asda sales fall for second straight quarter

* Says rivals' use of vouchers hurting their profit

* Says 1 bln stg price cuts pledge could be exceeded (Recasts, adds detail, CEO comments)

By James Davey

LONDON, Feb 19 (Reuters) - Asda, the British arm of U.S. supermarket group Wal-Mart, blamed a fall in its sales on the unprecedented use of discount vouchers by its big four rivals and warned the practise was unsustainable and damaging profits across the sector.

Of Britain's big four supermarkets - market leader Tesco , Asda, Sainsbury's and Morrisons - Asda's market share has been the most stable over the last couple of years.

But having delivered sales growth at stores open more than one year in the first two quarters of its 2014-15 financial year, they turned negative in the third quarter and on Thursday Asda posted a 2.6 percent fall in like-for-like sales over the 12 weeks to Jan. 4, its fiscal fourth quarter.

Industry data last week had shown Asda as the worst performing of the leading chains over the 12 weeks to Feb. 1. That data also showed Tesco (Xetra: 852647 - news) returning to sales growth for the first time since Jan. 2014 and Morrisons' best outcome since Dec. 2013.

Some analysts reckon improving momentum at Tesco and Morrisons is impacting on Asda's performance.

However, Asda Chief Executive Andy Clarke laid the blame for its sales decline squarely on rivals' excessive use of "10 pounds off 40 pounds shop" vouchers over the Christmas quarter, which he said was driving unprofitable sales for them.

"There's no doubt that Q4 drove a higher level of distress in the market with a significant amount of vouchering and promotional activity, I would say unsustainable medium term activity," he told reporters.

"You can only give away 10 pound notes for 9 pounds for so long," he said, noting that eventually "sanity takes over from vanity."

Referring to Tesco specifically, Clarke (Toronto: CKI.TO - news) , now the longest-serving boss of a big UK supermarket after the departure of all his major rivals over the last year, said: "I would suggest that you can only follow that approach for a short period of time or as long as your shareholders allow you to operate at a very different level of profitability."

All of Britain's big four are losing share to German discounters Aldi and Lidl and are cutting prices and improving stores and service to hold onto shoppers.

Asda was the first of the big four to lower prices, saying in November 2013 it would spend 1 billion pounds ($1.54 billion) on reductions over five years.

It also stopped issuing money off vouchers over a year ago, calling them short sighted "gimmicks" and likening their use to the Bank of England's quantitative easing, or money printing, programme. Instead it is focusing on straightforward price cuts.

Having already invested 300 million pounds in reductions in 2014, Clarke said the 1 billion pounds pledge could be exceeded.

"We'll address that over time if it needs to be more than that," he said.

Asda said on Thursday it would invest an additional 600 million pounds in 2015, opening 17 new stores, 36 petrol stations, over 150 remote click & collect sites and re-modelling 62 stores.

Clarke also said the firm was in the midst of a "brand refresh", changing aspects of its brand to replicate parent Wal-Mart.

Separately on Friday Wal-Mart reported better-than- expected fourth-quarter profit. ($1 = 0.6476 pounds) (Additional reporting by Neil Maidment; editing by Susan Thomas)