Next predicts consumer spending will be squeezed this year

Next said same-store sales, which strip out the impact of new outlets, fell 3.2% between 30 July and 24 December.

Sales at its Next Directory business were up 2.2% in the period.

Next said tight controls on costs would help annual profits to come in ahead of forecasts, although it was "extremely cautious" on prospects for 2008.

Retail focus

Shares in Next closed down 6.8%, with the retailer's downbeat comments unsettling investors.

It seems that the festive cheer has already evaporated on the High Street Richard Hunter, Hargreaves Lansdown Stockbrokers See Next's share price

The retail sector was also hit by a profit warning from Currys and PC World owner DSG, which got the Christmas trading period reporting season off to a gloomy start.

Many analysts have predicted that stores will have experienced their toughest festive period for some years.

"Along with the statement today from DSG, it seems that the festive cheer has already evaporated on the High Street," said Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers

"The comments from Next, whilst understandable, were not what the market wanted to hear."

Spending squeeze

Next said that it had not discounted prices in the run up to Christmas, and that its sales clearance was progressing in line with expectations.

However, it said it was cautious about the outlook for the coming year, with consumers "continuing to face increasing demands on their finances".

"Many will experience year-on-year increases in mortgage charges for much of the coming year as a result of favourable fixed-rate mortgage terms expiring," the retailer said.

It forecast its profits for the current financial year would come in "slightly ahead" of analysts' expectations of �492m-�502m.