(Refiles to add missing words in fourth paragraph)
* H1 underlying profit 1.57 bln pounds, vs forecast 1.48 bln
* Q2 UK underlying sales up 3.1 percent, vs forecast 3.4 percent
* Says sales growth converging with main British rivals
* Says ready meals, organics, non-food sales now growing
* Shares up 0.5 percent
(Adds finance director comment, updates shares)
By Mark Potter and James Davey
LONDON, Oct 6 (Reuters) - Tesco the world's third-biggest retailer, posted first-half profit towards the top end of forecasts and said it was seeing a gradual economic recovery with shoppers starting to treat themselves again.
The supermarket group also said on Tuesday growth in its core British market had converged with rivals in recent weeks, but its second-quarter performance was towards the bottom end of forecasts as a prolonged rise in food prices comes to an end.
Tesco's growth rate has been lagging its main competitors in Britain due, in part, to its exposure to non-food products which have been hit harder than groceries in the recession.
Chief executive Terry Leahy said sales of non-food products, hit hard in the recession, had returned to growth, and demand for more expensive groceries, like organic foods, ready meals and Tesco's "Finest" range, was picking up, adding to recent signs of improving confidence among shoppers.
Tesco, which runs over 4,300 shops in 14 countries, said profit before tax and one-off items rose 8.6 percent to 1.57 billion pounds ($2.5 billion) in the six months to Aug. 29, helped by deals last year to buy a store chain in South Korea and to take full control of a banking joint venture.
That was the smallest increase for 10 years as interest costs climbed because of the debt taken on to pay for the deals, but towards the top end of analysts' forecast range of 1.31-1.62 billion pounds, according to a Reuters poll of 12.
Sales increased 9.3 percent to 27.8 billion pounds, and the interim dividend was lifted 9 percent to 3.89 pence.
"Solid, but not inspiring," was the verdict of BofA-Merrill Lynch analyst John Kershaw.
Tesco shares, which have beaten British rivals Sainsbury and Morrison this year on hopes of a recovery in non-food spending, were up 0.5 percent at 393.3 pence at 1245 GMT, lagging the DJ Stoxx European retail index. For a graphic showing price performance of British food retail companies, click here:
http://graphics.thomsonreuters.com/109/UK_RTLEQ1009.gif
CONVERGENCE
Grocers have fared better than many retailers in the recession, thanks to their focus on selling essential goods and a prolonged period of rising food prices.
Retail sales in the European Union fell 0.3 percent in August from July, with the drop in non-food sales more than offsetting demand for groceries.
But food inflation has fallen recently as commodities prices have eased, contributing to profit warnings from European and U.S. supermarket chains.
The impact has been delayed in Britain by a weaker pound. Leahy said food inflation had now slowed to zero, but saw little risk of significant deflation.
Tesco said sales in Britain -- around two thirds of its total -- rose 3.1 percent for stores open at least a year, excluding fuel and VAT sales tax, in the second quarter.
That was down from 4.3 percent in the first quarter, due mainly to the lower food inflation, and below analysts' average forecast of 3.4 percent in a Reuters poll.
Sainsbury is expected to post a 5.6 percent rise in underlying sales on Wednesday.
But Leahy said Tesco's growth had converged with rivals in recent weeks, helped by the relaunches of its Clubcard scheme.
British food maker Northern Foods also reported a drop in food price inflation on Tuesday.
Tesco finance director Laurie McIlwee said the group would consider all opportunities to boost its fledgling banking business by, for example, buying deposit or mortgage loan books.
But he also said it did not need to do a deal, that it was not interested in buying bank branches and it had no plans to buy nationalised bank Northern Rock.
Tesco has been tipped as a potential bidder of assets from Northern Rock and Lloyds Banking Group.
Tesco shares trade at about 13.4 times forecast earnings, below bigger rival Carrefour on 14.9 and world number one Wal-Mart on 13.8. (Editing by Paul Sandle and Dan Lalor) ($1 = 0.6279 pound)