LONDON (Reuters) - British luxury fashion group Mulberry (>> Mulberry Group PLC) warned its annual profit would be substantially below forecasts due to heavy Christmas discounting in Britain and weak demand in South Korea, wiping more than a quarter off its shares.

The Bayswater and Alexa handbags maker said on Wednesday total retail sales for the 17 weeks to January 25 were down 3 percent on a year ago, which included a 7 percent decline for the crucial 8 weeks to January 25 Christmas period.

Mulberry's shares fell some 26 percent, wiping around 140 million pounds ($232 million) off its value and leaving it with a market cap of 400 million pounds.

"Due to tough trading conditions over the Christmas period which saw significant discounting across the market, Mulberry has experienced lower than expected UK retail sales," Chief Executive Bruno Guillon said in a statement.

"Together with wholesale order cancellations from Korea, (this) will adversely impact our profit this year."

Analysts had been expecting a pretax profit of 27 million pounds ($44.61 million) for the full year to the end of March, according to Reuters data. Guillon told Reuters he now expected pre-tax profit to be around 19 million pounds.

The warning is a blow to Guillon, who has embarked on a drive to increase the company's profile overseas, targeting affluent Asian shoppers with new stores in key tourist spots and hiking prices to take its brand more upmarket from a traditional position of "affordable luxury."

Retail analyst Nick Bubb said the transition from a UK success story into a global brand did not appear to be going well. "It's all gone a bit wrong for poor old Mulberry since the spring of 2012, just after Bruno Guillon joined as CEO from Hermès, when its share price was nearly 2500p and the market cap was getting on for 1.5 billion."

The group said in December that while 60 percent of its bags were still on sale for under 1,000 pounds, new offers priced at up to 1,500 pounds were increasingly popular. Its latest Bayswater and Alexa bags sell on its website for 1,100 pounds and upwards.

Mulberry, which made around 65 percent of its revenue in the UK in 2013, said it did not go on sale until Boxing Day, as usual, but that it had lost out to rivals who slashed prices in the run up to Christmas.

Adding to a tough UK, Mulberry said that significant order cancellations from over-stocked Korean customers meant it expected full-year wholesale sales to be 10 percent down on a year ago.

Wholesale makes up 35 percent of group sales for Mulberry, while Korea makes up 20 percent of wholesale.

That fall would wipe out retail sales growth over the year, the firm said, and when combined with the costs associated with its recent store opening programme, would mean full-year profits coming in "substantially below" forecasts. ($1 = 0.6030 British pounds)

(Reporting by Neil Maidment; Editing by Kate Holton and Jane Merriman)

By Neil Maidment

Stocks treated in this article : Mulberry Group PLC, Mothercare plc, Debenhams Plc