* Q2 like-for-like sales, ex fuel, fall 2.8 pct
* Cuts full-year sales forecast
* Says dividend payout part of wide-ranging strategic review
* Says "100 pct" confident in accounts
* Shares fall up to 6.6 pct, down 35 pct so far this year (Adds share context, shareholder comment)
By James Davey and Kate Holton
LONDON, Oct 1 (Reuters) - British grocer Sainsbury's cut its annual sales forecast and said it would reviewits dividend as part of a wider examination of the business,adding to the turmoil in a sector reeling from Tesco's accounting scandal.
The announcements, which followed a slump in quarterlysales, pushed the retailer's shares to a six-year low and alsodragged down sector peers, already under pressure from the Tescodebacle which has spooked the whole industry.
Up until the fourth quarter of Sainsbury's 2013-14 year, ithad been outperforming rivals, reporting nine unbroken years ofsales growth. It has since posted three straight quarters offalling sales as discounters won market share from theestablished grocers and consumers shopped around to save money.
Chief Executive Mike Coupe, who succeeded Justin King inJuly, told reporters market conditions were the most challenginghe had experienced in his 30-year career in retail.
"Customers have more choice today than they've ever had andthey're shopping around more than they have ever done," he said."There's topspin added to that by virtue of the fact that thereis price deflation in the market for the first time in ageneration."
Coupe said his strategic review would look at all aspects ofthe business. "There will be no stone unturned," he said.
Sainsbury's said it now expected second-half sales at storesopen over a year to fall by a similar amount to the 2.1 percentfall recorded in the first half. The firm had previouslyforecast a small increase for the year as a whole.
Shares in the retailer, which trails market leader Tesco andis battling with Wal-Mart Stores' Asda to be the UK'sNo. 2 grocer, fell up to 6.6 percent to a six-year low after itsaid it would assess its dividend payout as part of the widerreview to be detailed by Coupe along with first-half results onNov. 12.
"If we are doing a full scale strategic review ... you'dexpect the dividend to be part of that full-scale review," saidChief Financial Officer John Rogers.
Shares in Morrisons, the UK's No. 4 grocer, fell up to 7percent, while Tesco fell up to 4.4 percent. Sentiment in Tescowas also dented by news Britain's financial watchdog has begun afull investigation into its accounting scandal.
Tesco said in August it was slashing its dividend payout.
The update from Sainsbury's combined with the freshinvestigation at Tesco wiped 1.2 billion pounds ($1.9 billion)off the market value of the two retailers plus rival Morrisons.
SQUEEZED MARGINS
Shore Capital analyst Clive Black downgraded his full-yeardividend payout expectation to 11.25 pence, a 35 percent cut tothe 17.3 pence a share Sainsbury's paid out for 2013-14.
Black cut his pretax profit forecast for 2014-15 by 17percent to 645 million pounds and said the firm was alsovulnerable to asset writedowns. Though he has a "hold" stance onthe stock, he sees the sector as "largely un-investible".
A possible dividend cut is unlikely to go down well withSainsbury's investors. Some 26 percent of its equity is owned bythe Qatar Investment Authority, while the different parts of theSainsbury family own around 11 percent.
"There's a slightly worrying undercurrent where people thinkit's quite macho to go out and slash dividends but dividends areimportant to lots of people in the market," one institutionalinvestor in Sainsbury's told Reuters.
"I think it would be a serious mistake to cut the dividend,"he said.
Coupe reckons Sainsbury's can set itself apart from rivalswith a strategy that focuses on own-brand products, on thequality, provenance and ethical credentials of its food, and onexpanding its fast-growing convenience and online businesses.
He said Sainsbury's prices "have never been sharper", addingits price position relative to Tesco "has never been better".
Tesco, Asda, Sainsbury's and Morrisons have all cut prices,squeezing industry profit margins. Tesco has warned on profitsthree times in two months, while Morrisons warned in March.
Analysts expect new Tesco boss Dave Lewis to cut pricesfurther to bolster its flagging trade, which will shake-up themarket even more. They estimate Tesco's second-quarterlike-for-like sales to be down about 6 percent.
UPSIDE DOWN
Britain's grocery market has been turned upside down inrecent years since German discounters Aldi and Lidl started aggressively winning market share from thetraditional "big four" grocers.
That sense of disarray was compounded last month by therevelation that Tesco had found a 250 million pound-sized holein its accounts, dragging the whole sector down. Its profitmis-statement related to income the grocer receives from foodsuppliers for selling more of their goods.
CFO Rogers said Sainsbury's was "100 percent confident" itaccounted for these promotional monies in the right way.
"There's a gross misrepresentation out there that somehowthis is a great area of subjectivity. It is simply not thecase," he said.
"It is actually quite an objective process. The accountingrules and regulations are very clearly defined and we have lotsof checks and balances...to make sure those are applied."
Sainsbury's said its like-for-like sales, excluding fuel,fell 2.8 percent in the 16 weeks to Sept. 27, its fiscal secondquarter. That compared with analysts' forecasts of down 3-4percent and a fall of 1.1 percent in the first quarter.
In June, Sainsbury's said it would also tackle the rise ofthe discounters by teaming up with Denmark's Dansk Supermarkedto bring the Netto brand back to the UK. It said on Wednesday itwas on track to open five Netto stores in northern England bythe end of its 2014-15 year.
King was credited with reviving Sainsbury's fortunes duringa decade at the helm. But he left at a time of major structuralchange in the grocery industry. Though consumers are benefitingfrom little, if any, food price inflation, they are continuingto spend cautiously and industry sales are growing at theslowest rate for more than two decades.
Industry data last week confirmed Asda as the best currentperformer of the "big four" UK grocers, with its year-on-yearmarket share up 1 percentage point to 17.4 percent, whileSainsbury's slipped 0.4 points to 16.2 percent.
(1 US dollar = 0.6173 British pound) (Editing by Pravin Char)
