Nearly £1.6 billion was wiped off the value of Marks & Spencer yesterday as the retailer reported its worst Christmas for three years and gave warning of a “serious softening” on the high street.

Shares in M&S plunged by 19 per cent, or 94½p, to 409p as the group dashed hopes that it might have survived the spending slowdown and instead said that trading may not improve until spring 2009.

Sir Stuart Rose, the chief executive, joined the calls for an interest-rate cut and said: “These are the toughest conditions I have seen for a decade.”

M&S reported that like-for-like sales revenues had fallen by 2.2 per cent, worse than expected, over the critical 13 weeks to December 29.

General merchandise sales dropped by 3.2 per cent and food sales fell for the first time since the beginning of 2005 – off 1.5 per cent.

Sir Stuart, who has enjoyed a seemingly unstoppable run of success since taking over in 2004, blamed price deflation for the falls and said that on a volume basis M&S had sold “more goods to more people” than the year before.

However, staff may now miss out on an annual bonus and the group’s planned £1.1 billion capital expenditure programme in the coming year may be scaled back.

Analysts said that M&S could fail to make £1 billion of annual profits in the current financial year and slashed forecasts for 2008-09 by as much as 20 per cent. Some predicted a profits fall next year.

The reaction sparked a rout across the stock market’s retail sector, with the FTSE 350 general retailers index suffering what is thought to be its biggest one-day loss since 1987. Debenhams tumbled 11 per cent, Kingfisher 8.6 per cent and Home Retail Group, owner of Argos, 6 per cent.

Eithne O’Leary, an analyst at Oriel Securities, said: “In our view, this morning’s statement puts the UK consumer firmly into recession territory and we expect 2008 to more closely mirror conditions seen in the early 1990s.”

Another added: “Stuart’s got himself into a difficult spot. Now he really has got it all to prove.”

Sir Stuart, who spent £1 million on M&S shares yesterday afternoon as a sign of his faith in the group, said that the sell-off reflected investors’ realisation that the high street slowdown was more severe than had been feared.

He said: “The stock market has woken up to the fact that the UK economy has got a bit of a cold. People were hoping it hasn’t – it has. The market has seriously softened and we are in for a tough time.”

Amid growing speculation over his future beyond 2009 and criticism of his strategy of competing with the likes of Primark and Tesco, Sir Stuart insisted that he would rather be at M&S than any other retailer in the present climate.

He added that, by lowering prices, M&S had been able to maintain market share in both general merchandise and food.

Prices across M&S in the autumn were on average 6 per cent lower than the previous year. Cashmere sweaters fell from £69 to £49 while men’s underpants more than halved to 60p.

Sir Stuart said: “If you look at our volume sales, we have had the biggest Christmas for six years. We gave our customers a fantastic Christmas.

“Life is all about up and down. There is no crisis here. All it is, is the largest clothing retailer saying: ‘Yes, the UK customer is being more circumspect about what they are spending.’ I’ve never seen such a polarised economy. The rich are getting richer, the West End in London is still strong, but go outside and it’s completely different.”

Sir Stuart refused to be drawn on his plans beyond 2009. On joining in 2004 to help to fight off a potential takeover bid from Sir Philip Green, he agreed to stay for five years.

Sir Stuart said: “I haven’t done four yet; when I have, it’s a legitimate question. The board are aware of the situation but at the moment it’s a bit premature. I ain’t gone yet.”

The update comes a week after Next reported a like-for-like sales fall of 3.2 per cent between August and January but said that it expected to beat profit targets in the current financial year after protecting its margins.

Richard Hyman, managing director of Verdict Consulting, said that the stock market had overreacted to M&S’s Christmas. “Does this mean the end of M&S’s recovery? Absolutely not. Does this mean the wheels are coming off? No. Stuart will be embarrassed, he’s just been knighted, but this will inspire him.”

Well poached

- Wm Morrison is growing sales at nearly 10 per cent a year in the first clear sign that it was the big Christmas supermarket winner

- Figures from TNS market research agency yesterday showed that its market share had climbed to 11.4 per cent in the last 12 weeks of 2007

- Analysts believe the television advertising has helped it to poach customers from its rivals. Tesco’s growth rate slowed to 4.2 per cent in December, from 6 per cent in November. Sainsbury’s grew at 4.2 per cent last month, against 5.4 per cent in November

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