CORRECTED-UPDATE 2-Australia's Wesfarmers starts year on sour note; surprises with $1.7 bln capital return

(Corrects headline of Aug 27 story to clarify that $1.7 bln is the value of the capital return and not a share buyback)

* Flags challenging first 7 weeks of FY2022

* Says sales at Bunnings, Kmart, Target, Catch down this year

* Profit for year ended June up 16%, increases final dividend

Aug 27 (Reuters) - Australian retail conglomerate Wesfarmers flagged a gloomy start to fiscal 2022 as COVID-19 lockdowns hammered sales, even as it surprised investors with a A$2.3 billion ($1.7 billion) return of capital after strong results for the year that just ended.

Wesfarmers Ltd shares fell as much as 2.7% on Friday after it said sales across its businesses - Bunnings, Kmart, Target, and online retailer Catch - fell in the first seven weeks of the new year.

“The impact of lockdowns on household and business confidence has become more acute as recent lockdowns have been extended and further widespread restrictions would negatively impact overall business activity and the group’s trading performance,” the company said in a statement.

More than half of Australia's 25 million population are under strict stay-at-home orders here with new daily COVID-19 infections topping 1,000 on Thursday for the first time since the global pandemic began.

Wesfarmers said sales at its hardware store Bunnings fell 4.7% in the first seven weeks of the year that started in July, although it was still 24.4% more than pre-pandemic levels.

Wesfarmers said it would continue to pay all permanent and many casual team members impacted by lockdowns until at least the end of December, a move which is expected to cost it A$2 million to A$4 million a week and impact near-term earnings.

Analysts at Jefferies, however, said in a note that despite a mixed start to the year for Wesfarmers with lockdowns requiring store closures in important markets, Bunnings, Officeworks and Catch sales trends remain very strong.

The Perth-based company posted a 16% jump in profit to A$2.38 billion for the twelve months ended June 30.

It also increased its final dividend payout to 90 Australian cents per share from 77 cents last year.

Revenue for the year just ended rose 10% to A$33.9 billion as a booming property market in the country shored up demand for hardware products at Bunnings. ($1 = 1.3845 Australian dollars) (Reporting by Indranil Sarkar and Aditya Munjuluru; Editing by Himani Sarkar)