LONDON, June 22 (Reuters) - Morrisons, Britain's No. 4 grocer, has fired the latest salvo in a growing price battle with rivals, launching another round of cuts on 135 basic products.

The firm, which trails market leader Tesco, Wal-Mart's Asda and Sainsbury's, issued a profit warning in March and set out a plan to combat a loss of trade to discounters as well as a weak overall food market.

The plan included investing 1 billion pounds ($1.68 billion)in price cuts over the next three years, financed by cost savings of the same amount.

The latest round of reductions covers predominantly grocery and household products and includes both big brand and own-brand items, Morrisons said in a statement on Sunday.

It will see prices slashed by as much as 41 percent, with an average reduction of 14 percent, it added.

"These are permanent price cuts, not promotions, and they won't be the last," said Chief Executive Dalton Philips.

Inflation in Britain dropped to a four-and-a-half-year low last month, partly due to lower food prices that may have been caused by a price war between major supermarkets, the Office for National Statistics said on Tuesday. ($1 = 0.5956 British Pounds) (Reporting by Clare Hutchison; Editing by Nick Macfie)