Dollar General Corp on Tuesday said it remained cautious about the rest of the year despite an encouraging start to the holiday season, as heightened competition in pricing and advertising could hurt sales and margins.

The discount chain also posted a bigger-than-expected increase in quarterly profit and total sales in line with Wall Street expectations. But sales at stores open at least a year were slightly weaker than some analysts expected.

Its shares fell 2 percent to $45.65 in morning trading on the New York Stock Exchange.

Dollar General, which prices most of its merchandise below $10, generally does well when economic concerns such as high unemployment and rising food prices push those on limited budgets to cut spending.

But competitors including Walmart have stepped up their focus on items priced at $1 or less and have been advertising heavily, putting pressure on stores such as Dollar General that operate on much smaller ad budgets.

Dollar General said customer confidence and spending remain under pressure as ongoing economic uncertainty threatened to cut into discretionary spending.

While Dollar General's latest quarter only ran through November 2, the chain said it was encouraged by results from the Thanksgiving weekend that came later in the month and the start of the holiday season.

The discount chain raised the lower end of its 2012 adjusted earnings forecast and slightly trimmed its sales view.

SALES JUMP 10 PCT

Profit rose to $207.7 million, or 62 cents per share, in the fiscal third quarter, from $171.2 million, or 50 cents, a year earlier.

Earnings rose to 63 cents per share, after adjusting for items such as expenses from a secondary offering and debt amendment fees, topping the analysts' average target of 60 cents, according to Thomson Reuters I/B/E/S.

Sales jumped 10.3 percent to $3.96 billion, in line with analysts' expectations.

Sales at stores open at least a year, or same-store sales, rose 4 percent.

Sanford Bernstein analyst Colin McGranahan said he looked for an increase of 4.5 percent, while BB&T Capital Markets analyst Anthony Chukumba expected a 5 percent gain.

While the profit came in ahead of expectations and Dollar General raised its forecast for the year, Chukumba said he was "a bit concerned" about the slowing sales growth.

Same-store sales rose 6.3 percent in the third quarter of last year and 5.1 percent in the second quarter of this year.

The latest increase outpaced recent growth at some competitors - 1.5 percent at Wal-Mart Stores Inc's Walmart U.S. chain and 1.6 percent at Dollar Tree Inc .

However, the results were not as strong as the 5.4 percent same-store sales increase at rival Family Dollar Stores Inc .

More shoppers visited Dollar General's stores during the quarter and spent more, on average, than a year ago, it said. Sales of items such as candy, snacks and perishables grew at a faster clip than sales of other merchandise.

Sales of certain basic apparel were strong and but higher-priced clothing sales were weak.

Dollar General is now calling for a fiscal-year profit of about $2.82 to $2.85 per share, versus a September forecast of about $2.77 to $2.85 per share. Both outlooks included about 4 cents per share from the favorable resolution of tax audits in the second quarter.

Analysts' average estimate is $2.86.

Dollar General expects sales to rise by 8 percent to 8.5 percent this fiscal year, after sticking to a forecast of 8 percent to 9 percent growth in September. It expects same-store sales to rise 4.5 percent to 5 percent, versus a September forecast of 4 percent to 5 percent.

For the current fourth quarter, it expects same-store sales to rise 3 percent to 4 percent.

Gross profit, as a percentage of sales, for the fourth quarter is expected to be flat or modestly lower than a year ago, and would lead to a modest decline in the gross profit rate for the year.

The chain also said it would start to sell tobacco products, after seeing competitors such as Family Dollar start selling items such as cigarettes.

(Reporting by Jessica Wohl in Chicago; Editing by Jeffrey Benkoe)