(Reuters) -Australia's top supermarket chain Woolworths reported a sluggish start to the new fiscal year on Wednesday as price-conscious consumers continued to spend less, sending its shares down 16% on course for their steepest decline on record.

Woolworths said sales at its primary revenue driver, Australian Food, grew 2.1% in the first eight weeks of the fiscal year starting July 1, lower than the Visible Alpha consensus forecast of 4.1% for the first six months.

The sales growth also lagged smaller peer Coles, which reported a nearly 5% growth on Tuesday in its supermarkets division for the first eight weeks of current fiscal.

The grocer's share price fell 16% to A$28.08 in morning trade, and was set to post its worst day on record.

"Our current trading performance has been below our ambition with customers continuing to cross-shop to find the best value," CEO Amanda Bardwell said in a statement.

Higher living costs have been reshaping consumer habits, with shoppers increasingly relying on discounts and looking around for better value products.

For the year ended June 29, earnings at the Australian Food segment declined 12.9%, driven by thinner margins, wage increases, and impact from a strike at its distribution centres in the first half.

That drove underlying profit down 19% to A$1.39 billion ($883.73 million) for the year, in line with a Visible Alpha consensus estimate of A$1.38 billion.

Analysts at Jarden called it a "disappointing result", with no signs of improving consumer traction after price cuts.

"Question now will be if something more fundamental needs to be done to get shoppers back into store as it does not appear, on face value, that WOW's loyalty, price and network investment is yielding the results it should," they added.

The grocer, however, said it expects Australian Food segment to return to mid- to high-single-digit operating earnings growth in the current financial year, but warned that near-term headwinds from declining tobacco sales could dent the earnings by up to A$100 million.

The company, which sells more than one-third of Australian groceries, declared a final dividend of 45 Australian cents per share, lower than 57 cents apiece declared last year.

($1 = 1.5389 Australian dollars)