Engineering giant BAE Systems, reporting profits down by almost two thirds, has warned that the industry downturn stemming from the 11 September attacks is set to continue.

The firm, which admitted in November that the attacks had undermined sales, warned the slowdown was still having a "significant impact" on civil aerospace operations.

And the company forecast that revenues from aircraft maker Airbus, which BAE part owns, would be "much reduced" this year.

The slide meant BAE will not this year record the resumption in prosperity growth which had been previously forecast.

But it said it was on course for recovery next year.

"In 2003 and improved performance from defence activities and a maintained position at Airbus can be expected to result in a resumption of growth," the firm said.

BAE's pre-tax profits of �70m for 2001 compared with �179m the year before.

But investors took comfort in 26% growth to �1.08bn in underlying earnings, excluding costs involved in the closure of a regional jet programme.

BAE shares stood 2p firmer at 327.5p in morning trade on Thursday.

Airbus revival

BAE said that while Airbus saw 101 of 375 aircraft orders cancelled after 11 September, the business was poised for recovery.

"The current market difficulties are a near term concern," BAE said.

"Prospects for Airbus remain excellent over the medium term."

BAE said it remained confident in prospects for the Airbus A400M military transport plane, despite rumours of flaky support for the programme among the eight countries which have placed orders for the aircraft.

"It will be a valuable addition to the Airbus portfolio of activities," Thursday's statement said.

BAE said its own defence operations would deliver "good growth" in 2003.

The first flight of the production-standard Eurofighter Typhoon jet is imminent, with customer approval timetabled for the second half of the year.