Marks & Spencer plans to cut its capital expenditure in half next year and to step up cost savings to bring down food prices after suffering its worst quarterly sales since the beginning of 2005.

In one of the biggest U-turns of his reign at the retailer, Sir Stuart Rose, executive chairman, said that M&S had no choice but to scale back its investment programme to cope with the tougher economic climate.

The group's much-lauded store refurbishment programme will grind to a halt and the pace of international expansion could slow as capital expenditure falls by £200 million to £700 million in the current financial year. It will drop to £400 million in 2009-10 as the company seeks to avoid cutting the dividend.

Only a year ago Sir Stuart insisted that M&S would carry on spending despite the onset of the credit crunch. At the time, he said: “If I said we are cutting back on capital expenditure, you would say we have no bottle and the business is going nowhere.”

Sir Stuart conceded yesterday that M&S would have to go back on its word as the company strives to meet already reduced full-year profit targets of £670 million. He said: “It is true that we are throttling back a little next year, but we are being prudent about expectations for the trading climate. You can't sell lousy product in great-looking stores, but you can still sell fantastic product in rather tired stores.”

M&S yesterday said that like-for-like sales fell by 6.1 per cent in the three months to September 27. Clothing and homewares fell by 6.4 per cent, while food dropped 5.9 per cent.

Sir Stuart said that it was a “steady” performance given the difficult trading environment and added that clothing had picked up marginally in recent weeks. Relief that the figures were not even worse after July's profit warning sent the shares up 17p, or 8 per cent, to 226½p.

However, analysts said that with a recession looming, there was a risk of further profit downgrades in the run-up to Christmas. Tony Shiret, analyst at Credit Suisse, said: “Stuart must be on the happy pills to give such an unswervingly upbeat assessment of what is a truly terrible performance.”

M&S has been particularly hard hit by the fierce competition between supermarkets and the hard discount chains such as Aldi and Lidl. Sir Stuart admitted that M&S's food business had “gone backwards slightly” and that the company had been sacrificing profits to remain competitive. It will now step up cost savings to put more money into cheaper prices.

“I said three months ago that there was a food price war going on and everyone laughed at me,” Sir Stuart said. “But there's the biggest price war going on that we have seen for years and we have responded. Our 'Dine in for two for £10' campaign has been a spectacular success. But the less core customer has migrated away from us and we've got to find ways of getting them back in.”

Sir Stuart said that Christmas would undoubtedly prove very difficult and that an interest rate cut by the Bank of England next week would help to give consumers a much-needed lift.

He said: “As a humble shopkeeper, we want customers to have more confidence about where their budgets are going. They are worried about inflation, interest rates, the equity value of their house, indeed, the safety of the pound in the bank, that's where some confidence needs to come back. A reduction in interest rates next week would be very encouraging. It will signal to consumers that the peak in interest rates has been reached and they can plan for next year — that is very important.”

M&S plans to hire 15,000 temporary staff for the run-up to Christmas, the same number as last year. Sir Stuart said that there were no immediate plans for job cuts. The Times revealed in August that M&S was cutting the group's redundancy terms by up to 25 per cent.

Sir Stuart said: “If, two years down the road things are still tough, we will have to have a think.”

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