Britain's biggest supermarket booked a 3.8 per cent fall in like-for-like sales, including VAT and petrol, compared with the same quarter last year, as price cuts, subdued consumer spending and disruption caused by store refurbishments weighed on revenues.
The update prompted further speculation over the future of chief executive Philip Clarke.
But the 40-year Tesco veteran, who insisted he has no plans to step down, declared the turnaround plan was on track, stating that the supermarket chain was "more competitive than we have been for many years".
Mr Clarke, now two years into the company's recovery plan, said: "The plan is working ... We've cut prices and they've brought down our like-for-like sales in the short term, but we're now much more competitive and volumes on the lines we've cut are up 28 per cent."
Tesco said it changed the emphasis of its price cuts from helping shoppers budget from "short-term, indiscriminate couponing". And it claimed the move to scale back couponing accounted for more than half of its underperformance versus the wider grocery market, compared to the final quarter of last year.
However, Mr Clarke warned like-for-like sales will continue to suffer if the price cuts do not lead to volume gains, and as stores are disrupted by the ongoing refurbishment programme.
Tesco refreshed more than 100 stores over the quarter, and pledged it will have modernised more than 200 by the end of its first half.
Mr Clarke said: "I see every day the improvements that are coming in the business, but I'm not making any promises about sales improvement in the next few quarters."
Some analysts claimed Tesco is still struggling to find its place in a grocery market which continues to polarise between discounters and high-end players.
This week Kantar Worldpanel reported that amid a further drop in grocery price inflation Lidl achieved a record share of 3.6 per cent of the UK grocery market for the 12 weeks ending May 25.
Waitrose retained its record 5.1 per cent share at the top end.
Rebecca O'Keefe, head of investment at stockbroker Interactive Investor, said: "Tesco is still struggling to work out where it fits in a world of discount supermarkets and high-end grocery shops, and as a consequence is losing market share to both.
"Unless Tesco can work out a compelling marketing strategy to retain their existing customers and start to attract back those they have lost, the relief rally this morning is likely to be temporary."
Richard Hunter at Hargreaves Lansdown Stockbrokers, said: "The quoted companies of the sector in general not particularly well regarded at present, and within this the market consensus of Tesco as a sell is likely to remain in place for the time being."
Tesco shares closed down 4p or 1.34 per cent at 293.5p.