* Q2 like-for-like sales, ex fuel, fall 2.8 pct
* Cuts full-year sales forecast
* Says dividend payout part of wide-ranging strategic review
* Says "100 pct" confident in accounts
* Shares fall up to 6.6 pct, down 35 pct so far this year (Adds share context, shareholder comment)
By James Davey and Kate Holton
LONDON, Oct 1 (Reuters) - British grocer Sainsbury's cut its annual sales forecast and said it would review its dividend as part of a wider examination of the business, adding to the turmoil in a sector reeling from Tesco's accounting scandal.
The announcements, which followed a slump in quarterly sales, pushed the retailer's shares to a six-year low and also dragged down sector peers, already under pressure from the Tesco debacle which has spooked the whole industry.
Up until the fourth quarter of Sainsbury's 2013-14 year, it had been outperforming rivals, reporting nine unbroken years of sales growth. It has since posted three straight quarters of falling sales as discounters won market share from the established grocers and consumers shopped around to save money.
Chief Executive Mike Coupe, who succeeded Justin King in July, told reporters market conditions were the most challenging he had experienced in his 30-year career in retail.
"Customers have more choice today than they've ever had and they're shopping around more than they have ever done," he said. "There's topspin added to that by virtue of the fact that there is price deflation in the market for the first time in a generation."
Coupe said his strategic review would look at all aspects of the business. "There will be no stone unturned," he said.
Sainsbury's said it now expected second-half sales at stores open over a year to fall by a similar amount to the 2.1 percent fall recorded in the first half. The firm had previously forecast a small increase for the year as a whole.
Shares in the retailer, which trails market leader Tesco and is battling with Wal-Mart Stores' Asda to be the UK's No. 2 grocer, fell up to 6.6 percent to a six-year low after it said it would assess its dividend payout as part of the wider review to be detailed by Coupe along with first-half results on Nov. 12.
"If we are doing a full scale strategic review ... you'd expect the dividend to be part of that full-scale review," said Chief Financial Officer John Rogers.
Shares in Morrisons, the UK's No. 4 grocer, fell up to 7 percent, while Tesco fell up to 4.4 percent. Sentiment in Tesco was also dented by news Britain's financial watchdog has begun a full investigation into its accounting scandal.
Tesco said in August it was slashing its dividend payout.
The update from Sainsbury's combined with the fresh investigation at Tesco wiped 1.2 billion pounds ($1.9 billion) off the market value of the two retailers plus rival Morrisons.
Shore Capital analyst Clive Black downgraded his full-year dividend payout expectation to 11.25 pence, a 35 percent cut to the 17.3 pence a share Sainsbury's paid out for 2013-14.
Black cut his pretax profit forecast for 2014-15 by 17 percent to 645 million pounds and said the firm was also vulnerable to asset writedowns. Though he has a "hold" stance on the stock, he sees the sector as "largely un-investible".
A possible dividend cut is unlikely to go down well with Sainsbury's investors. Some 26 percent of its equity is owned by the Qatar Investment Authority, while the different parts of the Sainsbury family own around 11 percent.
"There's a slightly worrying undercurrent where people think it's quite macho to go out and slash dividends but dividends are important to lots of people in the market," one institutional investor in Sainsbury's told Reuters.
"I think it would be a serious mistake to cut the dividend," he said.
Coupe reckons Sainsbury's can set itself apart from rivals with a strategy that focuses on own-brand products, on the quality, provenance and ethical credentials of its food, and on expanding its fast-growing convenience and online businesses.
He said Sainsbury's prices "have never been sharper", adding its price position relative to Tesco "has never been better".
Tesco, Asda, Sainsbury's and Morrisons have all cut prices, squeezing industry profit margins. Tesco has warned on profits three times in two months, while Morrisons warned in March.
Analysts expect new Tesco boss Dave Lewis to cut prices further to bolster its flagging trade, which will shake-up the market even more. They estimate Tesco's second-quarter like-for-like sales to be down about 6 percent.
Britain's grocery market has been turned upside down in recent years since German discounters Aldi and Lidl started aggressively winning market share from the traditional "big four" grocers.
That sense of disarray was compounded last month by the revelation that Tesco had found a 250 million pound-sized hole in its accounts, dragging the whole sector down. Its profit mis-statement related to income the grocer receives from food suppliers for selling more of their goods.
CFO Rogers said Sainsbury's was "100 percent confident" it accounted for these promotional monies in the right way.
"There's a gross misrepresentation out there that somehow this is a great area of subjectivity. It is simply not the case," he said.
"It is actually quite an objective process. The accounting rules and regulations are very clearly defined and we have lots of checks and balances...to make sure those are applied."
Sainsbury's said its like-for-like sales, excluding fuel, fell 2.8 percent in the 16 weeks to Sept. 27, its fiscal second quarter. That compared with analysts' forecasts of down 3-4 percent and a fall of 1.1 percent in the first quarter.
In June, Sainsbury's said it would also tackle the rise of the discounters by teaming up with Denmark's Dansk Supermarked to bring the Netto brand back to the UK. It said on Wednesday it was on track to open five Netto stores in northern England by the end of its 2014-15 year.
King was credited with reviving Sainsbury's fortunes during a decade at the helm. But he left at a time of major structural change in the grocery industry. Though consumers are benefiting from little, if any, food price inflation, they are continuing to spend cautiously and industry sales are growing at the slowest rate for more than two decades.
Industry data last week confirmed Asda as the best current performer of the "big four" UK grocers, with its year-on-year market share up 1 percentage point to 17.4 percent, while Sainsbury's slipped 0.4 points to 16.2 percent.
1 US dollar = 0.6173 British pound Editing by Pravin Char