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By Dominique Vidalon and Kate Holton

PARIS/LONDON, July 2 (Reuters) - Europe's largest supermarket groups Carrefour and Tesco have agreed to form a global purchasing alliance to demand better terms from major suppliers in the latest attempt by the industry to drive down costs.

With combined annual sales of $170 billion, the partnership is designed to secure a better deal from the likes of Nestle , Procter & Gamble, Unilever, Danone and others to help the French and British groups to compete hard on price.

Such alliances are becoming increasingly common in Europe's retail sector as supermarkets battle to keep prices down to counter German-owned discount groups Aldi and Lidl and the looming shadow of U.S. internet giant Amazon.

Carrefour has been struggling at home while Tesco could lose its long-held number one spot in Britain after second-ranked Sainsbury's agreed to buy Wal-Mart owned Asda, the number three player.

Analysts warned the two groups needed to avoid triggering a price war. Suppliers said it posed a threat to their survival.

"This ... combines the purchasing expertise of two world leaders, complementary in their geographies, with common strategies," said Carrefour CEO Alexandre Bompard.

To be formally agreed over the next two months and to run for an initial three years, the alliance will cover the joint purchasing of own-brand products and goods used by the companies, as well as marketing and data collection.

It is unlikely to include fresh food as both companies will still work with suppliers at a local and national level.

"By working together and making the most of our collective product expertise and sourcing capability, we will be able to serve our customers even better," said Tesco CEO Dave Lewis, a former Unilever executive.

Carrefour, which started talks with Tesco last autumn, stands to benefit from Tesco's expertise in own label products, Morningstar analysts said. These account for around 50 percent of Tesco sales against 25 percent for Carrefour.

FIGHT BACK

According to Euromonitor International, a combined Carrefour and Tesco will hold an 8 percent share of the western European grocery market, ahead of Lidl's owner on 6 percent and Aldi Group on 5 percent.

The German discounters, operating in Europe, the U.S. and China, have developed powerful global supply chains due to their purchase of a narrow range of products bought at huge volume.

"We wonder whether the advance of players like Amazon and the German discounters (businesses underpinned by truly global supply chains) will continue to force a drastic change in sourcing processes," analysts at Jefferies said.

European groups Auchan Retail, Casino, Metro and Schiever agreed their own purchasing partnership last week.

Carrefour and Tesco have limited overlap and in the two markets where they do - Poland and China - it will not apply.

Jefferies estimated the deal could lead to initial total savings of 400 million pounds or 450 million euros. Some analysts speculated that the Carrefour-Tesco alliance could even be the precursor to a merger between the two.

Carrefour, Europe's largest retailer, makes the bulk of its 88 billion euros ($102.5 billion) worth of sales in Europe and Brazil while Tesco operates in Britain, Ireland, eastern Europe, Malaysia and Thailand, and has a wholesale presence in India.

The two groups also face challenges on the horizon.

Carrefour has issued cautious targets for this year after weakness in its home market weighed on sales growth in the first three months of the year.

In January it announced plans to cut costs and jobs, boost e-commerce investment and seek a partnership in China, in an effort to lift profit and revenue and beat domestic rivals in the race to develop digital shopping products.

It has already agreed a five-year purchasing alliance with French supermarket firm Systeme-U to make Carrefour the biggest buyer in its home market where competition has been fierce.

Smaller rival Casino's Monoprix chain in March became the first local retailer to sell groceries via Amazon in the Paris area. This followed a deal last year between Casino and grocery e-commerce tech provider Ocado Group Plc.

THREAT TO SUPPLIERS

Tesco, with sales of 51 billion pounds ($67.2 billion) before it purchased the wholesaler Booker, has rebuilt itself under Lewis after the discovery of an accounting scandal in 2014 compounded a sharp downturn in trading, which strained relations with suppliers at the time.

It has cut costs, invested in stores and bought Booker to expand into supplying restaurants, cafes and local stores.

Shares in both Carrefour and Tesco made only modest gains, with European stock markets under pressure.

Mella Frewen, director general of industry body FoodDrinkEurope, warned that the creation of such huge buying alliances threatened her members

"On top of the recent Sainsbury - ASDA alliance, this will have a huge impact on the balance of power along the food chain, to the detriment of all suppliers, regardless of size."

Tensions have been rising between retailers and suppliers as consumers demand lower prices. A group of European supermarkets have boycotted Nestle this year over a price dispute.

Jonathan Buxton, head of Consumer and Retail at M&A advisory group Cavendish Corporate Finance, said the partnership was designed to contain discounters, defend margins and counter any future move by Amazon.

"While the partnership stands to partially solve the significant strategic and market issues both retailers face, there is clear logic for the deal to become permanent and could result in a formal merger between the two firms." ($1 = 0.7595 pounds) ($1 = 0.8587 euros) (Editing by Sudip Kar-Gupta/Keith Weir)

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