Marks & Spencer's refusal to cut prices during the weeks before Christmas paid off today as the recovering high street chain reported a forecast-busting increase in sales during its third quarter.

In a keenly anticipated trading update covering the 13 weeks to December 31, M&S said sales during this crucial period had increased by 4.8 per cent - with underlying sales up by 2.9 per cent.

Analysts had pencilled in an increase in same-store sales of no more than 2 per cent.

And crucially, full-price sales of general merchandise - everything other than food - were up by 5.3 per cent, vindicating the strategy of Stuart Rose, the chief executive, not to discount goods.

M&S said that, because of its "tight control of inventory", it was left with about 35 per cent less stock going into its Christmas clearance sale.

As it increased clothing sales by 1.9 per cent and home items by 3.8 per cent, M&S also surprised the City by managing to push up food sales by a healthy 7.9 per cent - thanks in part to its high-profile television advertising campaign over the festive season.

Richard Ratner at Seymour Pierce said he was "pleasantly surprised" by the increase in food sales and said holding the line on full-price sales had been "very important".

"We had initially been going for a like-for-like increase in food of 3 per cent," Mr Ratner said. "But then with the sales rise at Waitrose and the figures from the BRC we thought we might be pleasantly surprised; and we were."

Figures out from both John Lewis, which owns Waitrose, and the British Retail Consortium showed a stronger than expected increase in sales over the Christmas season.

Paul Mumford, a senior fund manager at Cavendish Asset Management, an M&S shareholder, said: "Christmas was the real test-case for Rose, to prove that the store could continue to deliver the earlier stages of its turnaround. It would seem that recovery is well on track.

"The challenge now is for the company to continue its sterling performance at full margin. The reformatting of the store portfolio and supporting advertising campaigns have made M&S much punchier – let’s hope it continues to pay off."

But even as Mr Rose confirmed the turnaround at M&S, which is now on track to record its second successive quarterly sales rise, he sounded a cautionary note.

"This has been an encouraging quarter. Looking ahead, we expect the market to remain challenging. Moreover, we are facing increasing cost pressures. Costs of fuel, utilities, rent and reates have risen sharply and well have an impact next year," Mr Rose said.

And as he outlined a £500 million store redevelopment programme to "change the face of M&S", Mr Rose added: "We remain focused on product, service and environment. We are undertaking a substantial programme of store development and expect to have over 30 per cent of our store portfolio in the new format by the end of 2006.

"We are on track against our plan although there remains much to do."

Shares in M&S, which have soared past 500p as Mr Rose's recovery took hold at the retailer, closed last night at 502p, valuting M&S at more than £8.3 billion.

To see what happens to the shares today click here

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