International Business Machines (IBM) shocked the financial markets by issuing a warning of a sharp fall in its profits for the first three months of 2002, though the markets soon shook off the bad news.

Big Blue said its first quarter revenue would fall 35% to about $18.5bn (�12.9bn) from $21bn a year ago, sending its share price 11% or $11 lower to $86.20 at one point.

It was the first time since June 1991 that the leading US computer maker had warned that its figures would disappoint.

The news sent shock waves through stock markets across the world.

"IBM's news implies that the strength of the US recovery is weaker than the markets had thought," said one Paris-based trader.

Mollified

But after the European markets had closed the US markets picked up again to close near where they started the day.

"IBM gave us bad news, but that doesn't mean all of Corporate America is going to do the same," said Arthur Hogan, chief market analyst at Jefferies & Co.

IBM's warning came just ahead of the reporting season, when US companies tell investors how they fared during the January to March period.

Weak spending

IBM blamed its fall in profits on weak computer spending by corporations during the period.

Much of its fall was due to weak sales at IBM's Technology Group, a maker of microchips for other companies.

The computer group "saw a continued slowdown in customer buying decisions in the first quarter", said chief financial officer, John Joyce.

The negative news dashed hopes held by some investors that this had been a good quarter for US companies.

The news was considered particularly serious for the ailing technology sector, which has yet to recover from the bursting of the dot.com balloon.

"IBM is so involved in so many aspects of technology. This is not good for the technology sector," said Okumus Capital president Ahmet Okumus.

Market impact

The IBM news sent US stock markets lower, with the Dow Jones index of leading US shares slipping 127.25 points or 1.2% to 10,144.39 in the first hour of trading.

But by the end of trading, Wall Street had shaken off the warning and bounced back to close down 22.56 or 0.2% at 10,249.08.

IBM fell $9.84 to $87.41. The technology heavy Nasdaq slipped 28.69 points or 1.6% to 1,741.34 while the broader Standard & Poor's 500 index fell 9.50 points or 0.9% to 1,113.23 in early trading.

But both indexes closed up after sentiment had recovered, with the Nasdaq closing up 15.75 or 0.9% at 1,785.78 and Standard & Poor's gaining 2.56 points or 0.2% to close at 1,125.29.

Global hit

European shares, which were already under pressure due to concerns about oil prices, fell to their lowest levels in five weeks following the IBM news.

In London, the FTSE index of leading UK shares closed down 1.1% at 5178.6, its lowest closing level since 1 March.

The Cac 40 index of leading French shares lost 1.86% to close at 4,431.88 points, its lowest finish since 27 February.

Germany's Dax index of leading shares closed down 1.52% at 5,180.33