Tesco gave warning of a slowdown in consumer spending and a “subdued” non-food market yesterday, sparking fears of a retail slump.

Shares in Britain’s biggest supermarket sank nearly 5 per cent to 434½, the biggest drop in four years, while Marks & Spencer, Next, Debenhams and Home Retail Group, the owner of Argos and Homebase, all dipped on conerns that interest-rate rises were beginning to bite. Underlying sales at tesco stores in the UK rose by 4.7 per cent in the three months to May 26, against analysts' hopes of 5.5 per cent. Sales of CDs and DVDs have been affected by online shopping and downloads and clothing sales were hit by poor weather in May.

Andrew Higginson, finance director of Tesco, said: “We have suggested that consumers are being a bit more cautious around non-food and more generally given the interest-rate hits.”

Mr Higginson said that the market had slowed and that Tesco was preparing for a tougher year, but insisted: “We are pleased with the numbers, which are ahead of our budget at this stage.”

Analysts said that the supermarket’s sales performance in the UK was disappointing, particularly given the positive benefits to sales from store extensions and inflation of 1.8 per cent related to the cost of seasonal foods and commodities.

The outlook for the big supermarkets is expected to be quite tough in the next few months. They are trying to improve on an exceptionally strong trading period a year ago, when the World Cup and good weather boosted food and drink sales.

The trickier environment has already kicked off a round of tit-for-tat price cuts by Tesco’s rivals Asda and Wm Morrison. The more competitive environment will put pressure on J Sainsbury, which produces sales figures tomorrow, to match its rivals on price.

Mr Higginson said that Tesco continued to take market share from its rivals and that it was quite difficult to read the outlook, given the many different factors affecting the sales figures.

Meanwhile, Tesco is to send paperwork outlining its £15-a-share offer to shareholders in Dobbies, the garden centre chain, in the next few days.

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