Source: John Lewis

LONDON, Sept 14 (Reuters) - Bellwether British retailer John Lewis reported an 18 percent drop in its first-half profit, hit by discounting at its department stores and a step up in investment, and forecast tough trading conditions would persist into 2012.

The employee-owned group, which runs upmarket grocer Waitrose as well as Britain's biggest department store chain, said it made a profit before tax of 91.2 million pounds ($144 million) in the six months ended July 30.

"Trading conditions are set to remain challenging through the rest of this year and into 2012," said Chairman Charlie Mayfield.

Many Britons are cutting back on spending in the face of higher prices, muted wages growth and government austerity.

A survey last week showed British like-for-like retail sales fell 0.6 percent year-on-year in August.

John Lewis has consistently outperformed the sales figures of its rivals, both in department stores and groceries, helped by its more affluent customer base and reputation for service.

The group said profits were dented by a 64 percent increase in capital spending to 253.8 million pounds as it opened new stores and invested in its online businesses.

At the John Lewis department stores it said tough trading also saw a 16.8 million pound drop in the profit contribution from like-for-like sales, while its pledge to be "never knowingly undersold" cost 9.3 million pounds as it matched competitors' discounts.

Gross sales rose 6.4 percent to 4.05 billion pounds, and were up 7.4 percent in the first six weeks of the second half, including like-for-like increases of 1.9 percent at John Lewis department stores and 3.9 percent at Waitrose.

Mayfield said he was confident both divisions would continue to outperform rivals in the second half.

Separately, British fashion retailer Next Plc raised its full-year profit forecast on Wednesday after an 8.5 percent increase in first-half earnings, driven by a strong performance from its Directory home shopping business.

John Lewis also reported strong demand over the Internet, with johnlewis.com sales up 27.2 percent and Waitrose.com, which has had some teething problems since its relaunch in March, up 26.8 percent.

($1=0.633 pounds)

(Reporting by Mark Potter; Editing by Greg Mahlich)