* Q1 UK underlying sales up 4.3 percent, matching forecast
* Q1 group sales up 9.7 percent
* Q1 international sales up 20.1 percent
* Shares up 1.7 percent, outperforming European rivals
(Adds more FD, analyst comments, detail, background, shares)
By Mark Potter
LONDON, June 16 (Reuters) - Tesco, the world's third-biggest retailer, posted its best quarterly sales rise in Britain for two years and said it was closing the gap on recent stronger growth rates at its main domestic rivals.
Britain's biggest retailer said on Tuesday first-quarter sales at UK stores open at least a year rose 4.3 percent, excluding fuel and VAT sales tax, in line with forecasts and up from 3.7 percent in the previous quarter.
Group sales rose 9.7 percent, including petrol, in the 13 weeks to May 30, with strong growth in international markets fuelled by new stores, currency moves and the benefits of an acquisition in South Korea last year.
Tesco, which makes about 70 percent of sales and three quarters of trading profit in Britain, has been losing market share for months to British rivals like Wal-Mart's Asda, J Sainsbury and Wm Morrison.
The group, which takes almost one in every three pounds spent in a British supermarket, has said this is due mainly to customers switching to its cheaper discount range, which has boosted sales volumes but meant it has not benefited from food price inflation as much as competitors.
"The relative performance is closing," finance director Laurie McIlwee told Reuters, adding rivals were also growing strongly after fixing some "real fundamentals" in their businesses around price and availability.
McIlwee said Sainsbury, which is forecast to report a 7.3 percent rise in first-quarter sales on Wednesday, was also benefiting from shoppers switching out of upmarket food retailers like Marks & Spencer as well as strength in south England.
NO RECOVERY YET
"An encouraging statement," said Shore Capital analyst Clive Black. "Tesco is a growth company and we see scope for it to benefit from improving economies as low ticket discretionary spend improves," he added, keeping a 'buy' rating on the stock.
At 0805 GMT, Tesco shares were up 1.7 percent at 362.3 pence, topping a 0.6 percent rise on the DJ Stoxx European retail index.
McIlwee said it was too early to talk of a recovery in Tesco's markets, but was encouraged that like-for-like sales growth had returned to non-food lines like electricals, homewares and toys, as well as upmarket ranges, like "Finest".
"We're still planning on a tough year," he said, adding shoppers' main focus remained on the lowest prices. Sales of Tesco's budget "Value" range were growing around 30 percent year-on-year, he said.
Tesco expected full-year underlying growth in Britain to be towards the bottom of its long-term 3-4 percent target range, as food price inflation eases, and was comfortable with analysts' consensus annual profit forecast, McIlwee said.
Analysts expect Tesco to make profit before tax and one-off items of 3.23 billion pounds ($5.3 billion) in the year to February 2010, up from 3.13 billion in 2008-09, according to Reuters Estimates.
Tesco, which employs around 470,000 people in over 4,300 stores in 14 countries, said first-quarter international sales rose 20.1 percent rise at actual exchange rates, or 11.4 percent at constant rates, with a strong performance in Asia offsetting tougher trading in many continental European markets.
Tesco shares have performed broadly in line with the DJ Stoxx European retail index this year. They trade at 12.3 times forecast earnings, below Sainsbury on 14.3 times and international rival Carrefour on 12.6 times. (Additional reporting by Dan Lalor; Editing by Andrew Callus) ($1 = 0.6133 pound)