The trading woes at Woolworths deepened after the retail chain reported a sharp deterioration in sales and margins during June and July.

Shares dived 13% after Woolies said like-for-like sales fell 6.7% in the six weeks to July 26, with margins also under pressure because a greater proportion of trade came from CDs and DVDs, rather than higher margin sales of warm weather outdoor products and clothing.

The company, which is currently searching for a new chief executive, also said it had been told by consultants that Woolies had the potential to build a sustainable business based on its small and medium-sized stores.

Further details on the company's review of its business will be included with half-year results in mid-September. It currently has around 800 stores.

Woolworths said it had already decided it was not the right time to sell its 40% stake in 2entertain, its DVD publishing joint venture with the BBC. DVD and CD wholesaling business EUK also has good growth prospects, it added.

Chairman Richard North said: "Our EUK and 2entertain business are continuing to trade well. The retail business, however, has seen a marked worsening of conditions in June and July in an increasingly competitive market. This is reflected in the sales figures for the last six weeks.

"In addition, sales over the first half as a whole have been achieved with a disappointing margin performance."

First quarter figures reported in mid-June showed a 2.2% drop in like-for-like figures for the 19 weeks to June 14.

Panmure Gordon stockbrokers described the trading update as "dreadful" and said it did not believe a dividend payment could be justified this year.

Analyst Philip Dorgan said: "Last year, Woolworths lost £59 million in the first half and made £87.5 million the second half. This year, we have losses of £75 million pencilled in for the first half and we believe that our new (full-year) forecast of breakeven could still be too optimistic."

The chain, which has struggled to revive sales amid cut-price competition from supermarkets, surprised investors last month by announcing the departure of well-respected chief executive Trevor Bish-Jones.