By Nandita Bose and Richa Naidu

NEW YORK (Reuters) - Target Corp (TGT.N) said on Tuesday it will rely more on low prices to compete with rivals like Wal-Mart and Amazon, admitted many of its stores needed freshening up, and told Wall Street its sales and profit estimates for 2017 are too high.

Shares of the retailer plunged to 2-1/2-year lows in heavy trading. Many of its rivals fell, too, including deep discount chains that will now face tougher competition on prices. For investors, the news was a shocking reminder that U.S. retailing remains a cutthroat business.

Target vowed aggressive promotions at a meeting with analysts and investors, saying new brands and investments in technology and small stores will allow it to eventually win back market share.

Although its e-commerce operation is growing, Target reported its third straight quarter of lower sales from existing stores, citing "unexpected softness" at its stores.

Target also forecast first-quarter profit short of Wall Street estimates. Shares sank 12.1 percent to $58.79, their biggest one-day percentage drop since 2008.

The stock has lost a quarter of its value since the holiday shopping season started in November, back to levels last seen in August 2014.

The retail industry faces pressure from lackluster U.S. economic growth, intense competition from Amazon.com (AMZN.O) and other online rivals and concerns about President Donald Trump's planned border tax.

With Tuesday's announcement, Target’s brand identity as a source for “cheap chic” fashion and other low-cost stylish goods is giving way to the push for lower prices, analysts said.

That prompted declines across the retail sector. Dow component Wal-Mart Stores Inc (WMT.N) closed down 1.1 percent, Kroger Co (KR.N) fell 1.3 percent and Macy's Inc (M.N) lost 1 percent. Dollar General Corp (DG.N) fell 4.9 percent and Dollar Tree (DLTR.O) was down 3.6 percent.

Shares of Amazon, whose market cap exceeds all those companies combined, closed down slightly.

The drop in Target shares also reflects missteps by the company, said Kim Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.

"Target didn't do its job of trying to engage its customers and the theory is they may have lost the ability to do it," she said. "That’s what the (stock) market is telling you."

The retailer plans "aggressive promotional activities" that would erode its operating profit by $1 billion this year, Chief Executive Brian Cornell said at the meeting on Tuesday.

Revamping older stores is also part of Cornell's plan. Target has "a large percentage of the portfolio where the buildings just don't match the brand. They are old. They're tired. And they have not been updated in years," he said on a conference call.

Target said it planned to invest $2 billion in 2017 on analytics, supply chain and opening 100 more small-format stores in urban neighborhoods and college markets. It also plans to launch more than 12 exclusive brands.

Target forecast full-year earnings of $3.80-$4.20 per share from continuing operations, while analysts on average were expecting profit above $5.00, according to Thomson Reuters I/B/E/S. [nBw2wpt55a]

TARGETING GROCERY SHOPPERS?

One of the first areas where prices will come down at Target is food, the company said. Food and pet supplies account for about a fifth of Target sales, according to its annual report.

On Monday, Reuters reported Wal-Mart launched a new front in U.S. price wars with a test in 1,200 stores to lower grocery prices. [nL2N1GC03L]

With Wal-Mart and Amazon already facing off on price, including in the grocery aisle, Target is in an uncomfortable middle ground. And where Wal-Mart has established itself as the nation's largest grocer, Target's foray into food has been less successful.

"Target is neither a full-line grocer nor a player with lots of niche specialty products; it is neither a high-end player, nor a price-focused discounter," said Neil Saunders, managing director of GlobalData Retail.

Target's grocery offerings are "confusing," he said.

Two years ago, bigger rival Wal-Mart aggressively cut prices across the board and boosted its online presence. Target could not act then due to costs related to a massive data breach and its decision to pull out of Canada.

"Target's got bigger issues (than Wal-Mart had)," said analyst Brian Yarbrough of Edward Jones.

"They've struggled since Brian Cornell’s come on to figure out what to do with their grocery department ... I think Target’s turnaround could take a little bit longer than Wal-Mart."

Separately, CEO Cornell said he has been talking with the Trump administration to argue against a border tax that would raise the price of imports, including food like coffee and bananas.

"We are trying to make sure consumers are not waking up paying prices that are 15 or 20 or 25 percent higher," Cornell said. "And it wouldn’t bring jobs back to the United States because we don’t have factories that are ready to start manufacturing these products."

SALES DECLINES

Target's same-store sales fell 1.5 percent in the fourth quarter, which includes the holiday season. That was steeper than the 1.3 percent drop analysts estimated, according to research firm Consensus Metrix.

Target expects same-store sales to decline by low-single digits in fiscal 2017. Analysts, on average, were expecting same-store sales to increase 0.4 percent in 2017.

A 34 percent jump in digital sales was not enough to keep overall net sales in the black. They fell for the sixth straight quarter, to $20.69 billion; adjusted profit of $1.45 per share was below the $1.51 expected.

(Reporting by Nandita Bose in New York, Richa Naidu in Bengaluru, Additional reporting by Siddharth Cavale in Bengaluru and Rodrigo Campos in New York; Writing by Nick Zieminski; Editing by Savio D'Souza and Meredith Mazzilli)