Grafton Group said yesterday that increasing competition in the Republic's DIY market and a softening UK market had dented first-half sales.

But the building materials group said its Irish merchanting business, which includes the recently-acquired Heiton Group, was performing strongly.

As result, first-half trading is in line with market expectations and Grafton remains confident of continued growth in profits and earnings per share in 2005.

Shares in Grafton initially lost more than three per cent of their value on the news as investors worried about signs of a deterioration in the UK market, which accounts for around 60 per cent of group sales.

But the share price rebounded later in the day, closing 1.5 per cent lower, as analysts left their full-year forecasts of 20 per cent EPS growth for the group unchanged. However, they noted that the current uncertainty could limit the room for further share price progress in the near-term, following the strong performance year to date.

"It's not the plain sailing it was 12 to 18 months ago," said Florence O'Donoghue, analyst with Davy Stockbrokers. "They are facing headwinds they didn't have back then."

Meanwhile, Merrion Stockbrokers downgraded the stock to a "hold" from a "buy".

In its trading statement, Grafton said its Irish merchanting businesses were achieving high single-digit like-for-like sales growth, boosted by the successful acquisition of Heiton and the strong economy.

Irish DIY sales are also growing on the back of new store openings and relocations to larger outlets, but increased competition in the Irish market has led to a slight reduction in like-for-like DIY sales, compared to last year.

Grafton said its UK merchanting operation experienced low single-digit like-for-like sales growth in the first half in a softening market.