LONDON (Reuters) - Supermarket chain Asda, the British arm of Wal-Mart Stores Inc (>> Wal-Mart Stores, Inc.), said it would spend over 1 billion pounds ($1.6 billion) on price cuts and product innovation as it looks to expand its share of the UK grocery market.

Asda, which runs behind market leader Tesco Plc (>> Tesco PLC) by annual sales and is battling to be Britain's No. 2 with a resurgent J Sainsbury Plc (>> J Sainsbury plc), said it would spend the equivalent of 1 billion pounds keeping prices below inflation over the next five years.

Setting out its strategic priorities on Thursday under its new slogan "You're better off at Asda", it also said it would invest 250 million pounds in product quality, style and design.

The group's comments came a day after Sainsbury showed its resilience to tough market conditions with a 7 percent rise in underlying first-half profit, contrasting with a decline at market leader Tesco Plc (>> Tesco PLC).

Asda's price-cutting promise is the latest example of British supermarket operators promoting their money-saving appeal, which they see as key to luring consumers.

Asda said it was cutting prices on the regularly bought staples such as fresh produce, milk and bread, but did not give any specific examples.

It also said it aimed to improve its core business and reach new customers in the UK, particularly in London and southeast England where it has traditionally been weak.

Chief Executive Andy Clarke told reporters the company was looking at convenience store formats, the fastest-growing channel in the UK grocery sector.

According to monthly data from market researcher Kantar Worldpanel, only Sainsbury and John Lewis's Waitrose among Britain's top six grocers are currently resisting pressure from discounters Aldi and Lidl to expand their market share.

In addition, Asda wants to grow its "Click and Collect" locations - where goods ordered online are collected at a store - to 1,000 from 218. It is targeting online sales of 3 billion pounds by 2018.

The group said on Thursday its sales growth had slowed a touch in its third quarter. Sales from stores open more than a year, excluding fuel and VAT sales tax, rose 0.3 percent in the 13 weeks to October 4.

Though that was a 12th straight quarter of growth, it compares with a second quarter rise of 0.7 percent.

"The market conditions are tough, competition is fierce and our customers' budgets are under intense pressure," Clarke said. ($1 = 0.6254 British pounds)

(Editing by David Holmes)

By James Davey and Paul Sandle