UPDATE 2-Falling food prices in Spain hit Q2 sales at Dia
* Iberia like-for-like sales down 5.6 pct
* Gross margin stable on strict cost control
* Shares down 1.7 percent (Recasts lead, adds analyst and company comments and shares)
By Sarah Morris
MADRID, July 28 (Reuters) - Spain's discount supermarket group Dia squeezed costs in its second quarter to cope with aggressive price-cutting and low inflation in its home market and neighbouring Portugal, which together generate two-thirds of sales.
Low inflation in the euro zone has led some economists to warn of the possibility of Japanese-style deflation where falling prices and wages lead consumers to curb spending, forcing retailers into a vicious circle of price cutting.
Dia said sales in like-for-like terms, excluding the boost from new stores, fell 5.6 percent in the second quarter in Spain and Portugal, where price competition remains stiff amid a fledgling economic recovery and high unemployment.
Shares in Dia, which are flat so far this year, fell 1.7 percent to 6.35 euros ($8.53), the heaviest decliner on Spain's blue chip index. It trades at an about 16 times price to earnings ratio, broadly in line with peers.
"In terms of the next few months it is important to point out that some signs of recovery in volumes (in Spain) are already being observed," the company said in a statement. Continuación...