Huge demand for Lord of the Rings, Minority Report and other popular digital video discs helped to lift like-for-like sales by 4.6% over Christmas at HMV, the film, music and book retailer.

Demand for DVDs was up 80% at the company which yesterday also announced better than expected interim pretax profits before exceptionals of £6m for the period to October 26, compared with a loss of £15.9m last time.

Shares in HMV raced ahead 5% to 120.25p, also lifted by predictions from chief executive Alan Giles that the business would meet financial targets despite uncertain economic conditions ahead.

The Waterstone's bookshops put in a strong performance with like-for-like sales up 5.6% and HMV slapped down speculation that Tim Waterstone was in the running to buy back the chain he founded.

"We have no intention of selling the business," insisted Mr Giles.

British music sales - the core of HMV's business - unexpectedly rose 1%, boosted by the latest compact discs from Robbie Williams, David Bowie and Coldplay.

Christmas is critical for HMV, which was floated on the stock market at 192p last May, because 90% of the company's profits come in the second half.

The 4.6% like-for-like sales figure growth covered the five weeks to January 4 and was supported by profit margins similar to last year.

HMV Europe, which includes the 155 British outlets, posted 5.6% growth in the five week period and 6% in the first six months to October 26.

"We are pleased to have delivered a strong improvement in the first half. Following a successful Christmas, when every one of the group's business performed well, we remain on track to meet out financial targets," said Mr Giles.

The North American business produced higher operating losses at £2.9m and HMV said it would be closing more of its eight US outlets "as we can afford it".

In Britain, HMV opened 20 new stores last year in towns such as Winchester and Colchester. There are plans for up to 15 more in 2003.

· Bookseller Ottakar's reported 5% like-for-like sales growth for the six weeks ending January 11. Bestselling titles included Terry Pratchett's Night Watch.

The company said prospects for 2003 were promising, boosted by news of the latest Harry Potter book being published on June 21.