Carphone Warehouse, Europe's largest mobile phone retailer, has said that slower sales across most of its European markets will see profits slide 10% this year.

The firm, revealing a 9% drop in sales over the last three months of 2001, warned of a continuation of conditions which have seen the total Europe handset market shrink by 40%.

The news was greeted with dismay by investors, and by the close of trade Carphone Warehouse shares had tumbled more than 17% to 93.25p.

"The overall market for mobile phone handset sales will continue to be tough for the next six months," chairman and chief executive Charles Dunstone said.

The statement echoed reported from retailer Dixons and mobile phone maker Motorola, which have also admitted declining handset sales.

The conditions will prompt a reversal of Europe's late-1990s explosion in mobile phone outlets.

"We foresee an ongoing contraction in the total number of distribution points," Mr Dunstone said.

'Disappointing'

The warning came as Carphone Warehouse revealed a 6% drop in phone connections over the last three months of 2001, when compared with the same period a year before, with results from Continental operations particularly weak.

"We continue to be disappointed by our performance in Germany, and the Netherlands and Belgium were also weaker than we had anticipated," Mr Dunstone said.

"Management focus has increased accordingly."

But Mr Dunstone forecast that the launch of improved products would boost sales later this year.

"From this autumn onwards we believe that a combination of new handset functionality and innovative technology will once again stimulate the market," he said.

Pre-pay popularity

Mr Dunstone also said that the firm's wholesale business had continued to "underperform", and presented little hope of recovery.

"We do not expect any significant improvement in this area for the next 12 months at least."

The continuing popularity of pre-pay handsets, on which margins are lower, over contract phones was also undermining takings, he added.

But the firm was continuing to gain market share, and now accounted for more than 20% of handset sales in the UK.

Against a weak market, the firm's UK performance was "particularly strong", Mr Dunstone said.