Retail sales declined by 0.1% in October, during a time when consumer confidence was shaken by turmoil in financial markets, the Office for National Statistics (ONS) said.

The decline was much better than expected by economists, who had predicted a fall of 0.5% or more.

But Vicky Redwood at Capital Economics said: "The much bigger 1.1% drop in non-food sales clearly suggests that discretionary spending is taking a hit.

"Household goods and clothing sales, in particular, nosedived, dropping by 1.5% and 3.4% respectively," she said.

"What's more, anecdotal evidence suggests that the past couple of weeks have been even more shocking for retailers, as illustrated by the rash of price discounting announced this week."

Major retailers have this week slashed prices in an apparent bid to breathe life into high street sales in the run up to Christmas, which should be their busiest period.

Marks & Spencer today cut prices by 20% in its clothing and homewares departments in its biggest one-day promotion for four years.

Retail giants Debenhams and Bhs were also discounting stock this week.
Debenhams said the sector was facing "the worst Christmas we have ever had".

Ms Redwood said falling inflation and interest rates would provide some relief to household budgets.

"But with unemployment rising sharply, house prices falling and credit becoming less available, we think that spending has much further to fall.

"It's shaping up to be a pretty awful Christmas for retailers."

The ONS figures show retail sales grew at an annual rate of 1.9% compared with 1.7% in September.

Against the previous month, the value of food sales rose by 1%, the ONS said.

But in the non-food sector, total sales values were down 1.2%, with household goods down 2.9% and textile, clothing and footwear showing a decline of 1.8%.

This suggests firms were discounting their goods in an attempt to boost sales.

Commenting on M&S's decision to slash prices today, spokeswoman Clare Wilkes said: "These are really unusual times and it's a very volatile and competitive environment and we need to trade through it.

"We need to compete for every share of the pound that is available to be spent."

Total sales in the three months to October were 2.2% higher than the same period a year ago, the lowest growth since April 2006, the ONS said.

In the same period, non-food store sales volumes increased by 2.5%, also the lowest growth since April 2006.

There were falls in non-specialist shops, such as department stores, while the decline in household goods sales was the largest since November 2005.

Howard Archer, of IHS Global Insight, said the ONS figures appeared to understate the downturn in consumer spending given the survey evidence from the British Retail Consortium, the CBI and reports from most retailers.

"Retailers will be desperately hoping that the recent slashing of interest rates from 4.50% to 3% by the Bank of England, the prospect of another large interest rate cut in December and the apparent imminent announcement of tax cuts by the Government will give a significant boost to sales over the vital Christmas shopping period," he said.

But he added that the festive season would be "very difficult" and "life looks likely to remain tough for some considerable time thereafter".

CEBR economist Charles Davis said: "Overall, the retail numbers were better than expected - but still show stagnation in underlying growth prospects as consumers suffer from the decline in credit availability, the squeeze on real disposable incomes and worries about unemployment."