Ocado average order size down as competition rises

* CEO says retail environment challenging

* Ocado to grow in line or slightly above online market

* Morrison's service scaling well (Adds details, background)

LONDON, Sept 11 (Reuters) - British online grocer Ocado reported gross retail sales rose 15.5 percent in its fiscal third quarter but average order size fell as competition increased in the business.

Gross sales rose to 218.5 million pounds ($354 million) in the 12 weeks to Aug. 10, compared with a rise of 15.6 percent in the first half, while average order size fell 1.7 percent to 111.64 pounds.

"We are pleased with the continued steady growth of our business despite the increasingly competitive nature of the market," Chief Executive Tim Steiner said in a statement.

Market leader Tesco (Xetra: 852647 - news) cut the delivery price for its online grocery orders this year.

"The retail environment is challenging with an increased level of promotional activity and price reductions across the industry," Steiner said, adding he expects Ocado to keep growing sales in line with or slightly above the online grocery market.

Britain's online grocery market is growing at around 15 percent a year, far outpacing the broader market, and while it still accounts for only about 5 percent of total grocery sales, industry group IGD (Milan: IGD.MI - news) sees it more than doubling in value over the next five years to 17 billion pounds.

Ocado, which struck a 200 million pound deal with Morrisons to provide its online grocery operation, said the service that was launched in January was scaling successfully as demand increased.

Ocado, whose range includes products supplied by upmarket grocer Waitrose, has not made an annual pretax profit since it was founded in 2000 but analysts are forecasting one for its 2013-14 financial year. 1 US dollar = 0.6172 British pound) (Reporting by Emma Thomasson; editing by Kate Holton)