The news is Europe. The surprise is Europe

Michael Lehman, Sun chief financial officer

The company had blamed weak demand in Europe for a dramatic drop in sales.

It lowered its forecast for the June quarter to 10% or more below Wall Street expectations.

"Certainly Sun's earnings warning was much worse than expected and weighing heavily on technology stocks," said Tim Ghriskey, senior portfolio manager at Dreyfus.

The Nasdaq composite index was down 3.4% in afternoon trade.

Increased competition

Sun has already been struggling with a slowdown in the US market in recent months, in common with other high-tech giants.

Now it says it is facing problems in its European business.

Chief financial officer Michael Lehman said: "The news is Europe. The surprise is Europe."

He said some Asia-Pacific demand was also below expectations.

He cut the companies' fourth quarter sales forecast to $3.8bn-4bn, compared with a $4.4bn average estimate of analysts polled by Thomson Financial/First Call.

Gross profit margins would also be down on April's forecast.

The margin was 41.6% in the third quarter but Sun's long-term goal is the high 40s.

Mr Lehman shrugged off questions that competitors such as IBM were encroaching on Sun's position as the number one US seller of powerful server computers.

Last month, Sun told workers it was closing for a month in July, as part of a cost-cutting programme.