UPDATE 1-Seven & I shares sink on big Q1 profit decline

*Seven & I falls as much as 8 pct on quarterly results

*Investors concerned about dismal supermarket operation

*Tough time expected to continue for retailers (Adds comments, updates with closing share price)

By Taiga Uranaka

TOKYO, July 3 (Reuters) - Shares in Seven & I Holdings (3382.T) tumbled on Friday after it booked a sharper than expected decline in its first-quarter profit as Japan's recession hit sales at its supermarkets and department stores.

Marking the start of the earnings reporting season, Japan's largest retailer said operating profit fell 17.5 percent in the three months ended in May -- a result which also hit other retail stocks such as rival Aeon (8267.T). [ID:nT83976]

"It's negative as we had expected a single-digit profit decline," Kazunori Tsuda, an analyst at Daiwa Institute of Research, wrote in a note to clients. With consumers deferring purchases of clothes as well as more expensive items to cope with tough times, profits at Seven & I's supermarket division fell by more than half, while profits for its department store division plunged 82 percent.

Earnings by its Seven-Eleven convenience stores, which account for three-quarters of its operating profit, fell 3.2 percent, helped as smokers were driven to its stores by a law requiring an ID card to buy cigarettes from vending machines.

SUPERMARKETS' STRUGGLE