The group said on Wednesday that while it was committed to retaining Homebase it would close about 80 of its 323 stores over the next four years through a combination of lease expirations and property exit deals with other retailers.

Homebase, like its larger UK rival B&Q, has suffered from an excess of retail space in Britain, the growth of non-traditional competitors such as supermarkets and the rise of a generation less skilled in do-it-yourself (DIY) projects. B&Q owner Kingfisher is also looking to cut UK space.

Shares in Home Retail, down 8 percent so far this year, fell up to a further 6 percent on Wednesday after the group also posted first-half profits below expectations. They recovered to be down 1.4 percent by 0906 GMT.

"The Homebase agenda must ... be set in the context of the Argos transformation plan which will be the group's greatest potential source of shareholder value and must therefore be the near-term priority of both the group's focus and its resources," Home Retail Chief Executive John Walden told reporters.

The 747-store Argos chain, which contributes around 70 percent of group revenue and contributes four times more profit than Homebase, is being reinvented from a catalogue firm - where items were selected from a laminated catalogue in stores - to a digitally-led business, targeting more sales from tablet PCs and mobile phones.

Argos is investing 300 million pounds in a five-year plan that is targeting a 15 percent rise in sales to 4.5 billion pounds by 2018.

THREE-YEAR PLAN

On Wednesday Walden unveiled a three-year plan for Homebase that in addition to the store closures detailed a programme to improve store productivity, operating and customer service standards, and accelerate its digital capabilities by using the know-how from the online drive at Argos.

"If successful by the end of full year 2018, Homebase will be a smaller but stronger business," he said.

Paul Loft - Homebase's managing director - is to step down when a successor is found, the firm said.

"A cleaner, more profitable business should benefit the group," said Investec analyst Alistair Davies.

Home Retail posted a 13 percent rise in underlying first-half profit to 30.9 million pounds in the six months to Aug. 30, below analysts' average forecast of 34.6 million pounds.

Sales increased 3 percent to 2.7 billion pounds, with sales at stores open over a year up 2.9 percent at Argos and 4.1 percent at Homebase.

The group said it was on track to make underlying pretax profit for the 2014-15 year in line with market expectations - 127 million pounds, according to Reuters data, up from 115 million pounds in 2013-14.

However, it said the full-year outcome will, as always, depend upon Argos' Christmas trading.

Home Retail ended the period with 333 million pounds of cash and maintained its interim dividend of 1 pence per share.

(Reporting by James Davey; Editing by Neil Maidment and Pravin Char)

By James Davey