By Mark Potter and James Davey

LONDON (Reuters) - Europe's retail sector is set for a pick-up in takeover activity, despite a weak consumer outlook, as groups that restructured in the recession turn their focus to growth and confidence returns to private equity firms.

Retail executives and bankers expect neither a glut of transactions nor a return to the mega-leveraged, multi-billion dollar purchases of the boom years.

But they said conditions were now right for a pick-up in small to medium-sized deals, like bicycle-to-car parts chain Halfords's recent purchase of Nationwide Autocentres for 73 million pounds ($109 million) and private equity firm KKR's takeover of Pets at Home for 955 million pounds.

"There are a lot of conversations going on, and some of them are now landing (deals)," said Richard Lowe, head of retail and wholesale at Barclays.

"I haven't seen this level of activity since 2008."

There were just $11.8 billion worth of retail takeover deals in Europe last year, down from $21.2 billion the year before and $56.5 billion in 2007, according to Thomson Reuters data.

While several retailers, including major players like Germany's Arcandor and Britain's Woolworths, collapsed in the downturn, it is striking how few were bought by rivals.

Survivors focused instead on adjusting their businesses to the recession -- cutting costs and stocks and improving supply chains -- and fighting for market share left by failed rivals.

But that may be changing.

Reaping the rewards of their restructuring, many retailers are seeing a return to profit growth in the face of sluggish economic recovery and are increasing their capital spending plans, despite an uncertain outlook for consumer spending.

Equity markets have also recovered from their lows, and debt markets are freeing up, creating the conditions for dealmaking.

At the same time, banks remain cautious about lending to firms that cannot demonstrate significant progress in paying down debts, which means there could still be distressed sellers.

"The timing is almost perfect for M&A (mergers and acquisitions)," Rob Templeman, the chief executive of British department stores group Debenhams told an industry conference last week.

TRADE BUYERS

One reason there were few deals last year was that retail property prices fell steeply and it was often cheaper and easier for stronger firms to open new stores themselves.

But that may also be changing.

While shop vacancy rates remain high, there are signs of growing competition for the best sites, which is driving prices up and could make acquisitions a more attractive alternative.

The IPD Quarterly Property Index showed retail property prices in Britain rose 9.7 percent in the three months to end-December, its fastest rising market segment.

The collapse of Icelandic investor Baugur last year has also left a number of deals waiting to be done, as assets were taken over by nationalized banks which will not be long-term holders.

Barclays' Lowe believes companies such as Aurora Fashions, which runs brands like Karen Millen, Coast, Warehouse and Oasis; Aurum, which owns jewelers Goldsmiths and Mappin & Webb; and the Iceland frozen foods chain, could all become available.

Possible buyers could include Philip Green, owner of the Arcadia fashion empire, who expressed an interest in Baugur's assets during its collapse, while Debenhams has said it is looking for more deals like its purchase of the Principles fashion brand and Danish department store group Magasin du Nord.

There are signs deals could also pick up in mainland Europe.

Dutch grocer Ahold has said it is looking for acquisitions in the United States and Europe, while analysts think German fragrances-to-fashion group Douglas could look to buy a French perfume retailer like Nocibe.

PRIVATE EQUITY

Store groups, however, are likely to face stiff competition for acquisitions from private equity groups, which are looking for bargains in a sector which generates a lot of cash for them to quickly pay down debt used to fund deals.

"Whilst it might be a good environment for trade buyers to be looking at businesses, I think we'll see time and again them being competed out by the private equity buyers," said Steve Burden, who leads the consumer business M&A advisory team at consultants Deloitte.

While private equity firms baulked at the price recently sought by John Hargreaves for budget fashion chain Matalan, they remain firm favorites to snap up a number of other chains up for sale, including British sofa retailer DFS, greeting cards chain Card Factory, and crafts specialist Hobbycraft.

The level of interest could encourage other potential sellers to come forward.

People familiar with the matter told Reuters on Friday 12 March that U.S. buyout firm Advent had hired Close Brothers to look at a possible sale of discount store chain Poundland.

SG Securities analysts think historically subdued equity valuations could make leveraged buyouts financially feasible for larger listed retailers like Marks & Spencer, Home Retail, Kesa and Debenhams.

However, bankers reckon a number of smaller deals will have to sealed first before private equity firms and their backers set their sights again on the really big targets.

(Additional reporting by Simon Meads and Sinead Cruise)

(Editing by David Cowell)

($1 = 0.6702 pound)