(Adds plan to return A$1.7 bln to shareholders, details,...

(Adds plan to return A$1.7 bln to shareholders, details, background)

Feb 20 (Reuters) - Australia's biggest grocery chain Woolworths Ltd (WOW) on Wednesday reported a slower rise in first-half profit due to muted consumer demand in a ruthlessly competitive market.

The grocer said continuing operations' net profit rose about 2 percent to A$920 million ($659.18 million) for the six months to Dec. 31, lower than a 14.7 percent jump recorded in the previous corresponding period.

“It was a challenging half across all of our businesses with subdued customer demand and volatile weather in the second quarter," Chief Executive Brad Banducci said.

Woolworths has been aggressively slashing shelf prices to undercut rivals such as Coles Group Ltd (COL) , discounters like Germany's ALDI Inc and online retailing juggernaut Amazon.com Inc AMZN.O .

The discounts, though a boon for Aussie shoppers experiencing tepid wage growth, have crimped margins across the supermarket sector, raising questions about profitability.

The Sydney-based company, which operates over 3,000 stores across Australia, said comparable grocery sales growth was 2.3 percent in the half-year, lagging Coles Group Ltd's (COL) 3 percent rise in the same period.

Woolworths' sales growth was impacted by a move to charge customers for one-use plastic bags before main rival Coles.

The backlash, dubbed "bag rage", had slackened first-quarter sales growth to its lowest in two years and started once Australia's ninth-biggest firm by market capitalisation removed single-use bags on June 20, prompting customer anger, online rage and staff abuse.

Woolworths also said it plans to return up to A$1.7 billion to shareholders after completion of its petrol business. The grocer in November said it will sell the business to British petrol retailer EG Group for A$1.73 billion, to cut non-core businesses and keep ahead of Coles.

Woolworths declared a final dividend of 45 Australian cents, up from 43 Australian cents a year earlier.

($1 = 1.3957 Australian dollars)

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Australia Woolworths' quarterly sales growth sputters on "bag 

rage" Australia's Woolworths to sell petrol business to EG Group for $1.25 bln

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