* Prices of 3,400 national brand items cut 20-35 percent

* Says cuts to own-label items alone not enough

* Companies prepared to sacrifice gross margin

By Taiga Uranaka

TOKYO, March 18 (Reuters) - Japan's second-largest retailer Aeon Co Ltd is marking down prices of 3,400 national brand items by 20 to 35 percent, extending a discounting wave as top stores chains seek to attract increasingly price-sensitive shoppers.

"Customers are seeking low prices," said Aeon President Motoya Okada at a briefing.

Consumers have been sharply cutting back spending to ride out the recession, shunning discretionary items such as clothing and trading down in daily necessities.

Aeon, which operates Jusco general merchandising stores and Maxvalu supermarkets, said last month it would cut prices of a third of its "Top Valu" private label items.

Okada said private label items alone cannot win customers' support and his company also had to mark down prices of national brand goods such as Kao Corp body soap and Ajinomoto instant foods.

Its bigger rival Seven & I Holdings said earlier this week its supermarket chain Ito-Yokado would mark down 2,600 items including cup noodles and shirts by 15 to 30 percent at its 175 stores.

"Since last year's (collapse of) Lehman, the Japanese economy took a sharp turn to worse and the retail environment has become more dire," said Ito-Yokado President Atsushi Kamei.

While Aeon and Seven & I say they have been able to bring down product costs through improvements in procurement and other efforts, they admit gross margin is not their top priority.

"We are sacrificing it more or less," Ito-Yokado's Kamei said when asked about the markdown's impact on gross margin. "It cannot be helped. Now, customers are deciding market prices."

Aeon, which expects its first annual net loss in seven years for the year ended in February, said it would cut about 1.3 billion yen ($13.2 million) in personnel costs by skipping bonuses for executives and cutting salaries for some 1,200 employees in management positions.

"It's wrong to try to secure margin at the expense of sales, and it's not feasible in most cases," Okada said. "We would rather go after topline while cutting costs." (Editing by David Holmes) ($1=98.47 Yen)