Model train maker Hornby also announced a severe profit warning causing its shares to crash by a quarter.

The alert is the latest in a series of blows for the UK retail sector, which has been hit hard by the slowdown in the economy.

Economic uncertainty is making people unwilling to spend

Arcadia, which was spun off from the Burton Group nearly a year ago, said: "There has been a slowdown in High Street spending and exceptionally high levels of mark-down driven competitor activity in what is normally a prime trading period."

As a direct result, the company warned interim results for the first half of the year may fail to meet previous expectations.

Sales overall in the first 13 weeks of its financial year have risen 0.4% but sales per square foot, a better measure of the group's underlying performance, dropped 1.8%.

Arcadia said that much still hung on the crucial trading period in the run up to Christmas.

Shares in the group, slumped almost 25% to 220p after the news.

Hornby said the crisis in consumer confidence had hit sales over the last six months in the UK, while the strong pound had damaged export trade.

Feeling the pinch

The retailers' announcements come just a day after women's fashion store Kookai issued a similar warning and kitchen appliances manufacturer Kenwood gave a gloomy sales forecast for the next six months.

Allders, the department store chain, complained that consumer confidence it at a low ebb and even Marks and Spencer has been feeling the pinch.

The UK's largest retailer announced a 23% first half profits slump in November, blaming it on a 'bloodbath' in UK clothes sales.

Retail experts are suggesting that the UK retail industry is in for a gloomy Yuletide season.

Just over a week ago retail research group Verdict said 1998 looks set to be the worst retail Christmas for two decades and a survey from chartered accountants Deloitte Touche Toshmatsu said retailers were less optimistic about Christmas shopping than last year.

The latest official figures showed that UK retail sales dropped 0.4% in October, with non-food spending down 0.2% on a year ago.