US energy giant TXU's profits have slumped by more than a third, hit by weak results from its European division.

The Dallas-based firm said profits for the three months to September came in at $206m (�131m), 38% down on the same period last year.

The profits slide reflects troubles at TXU's European operation, which was hit by a sharp drop in electricity prices in its key UK market.

But on Wall Street, investors took the view that TXU is over the worst of the crisis, and its shares ended the day more than 12% higher.

Retreat

TXU, facing the threat of a downgrade in its credit rating, earlier this month withdrew a $700m cash lifeline from its ailing European division, effectively putting it up for sale.

Its UK operations were snapped up for $2.12bn last week by Powergen, the British subsidiary of German power firm Eon.

TXU's remaining European businesses are based in Germany and Scandinavia.

TXU chief executive Erle Nye said in an interview on Wednesday that withdrawing from Europe was "a grave disappointment to me.

"It's a bitter pill to get caught in this capital situation," he said.

Locked in

The company had hoped to cash in on a growing trend towards electricity market liberalisation in Europe, but had not bargained for a 40% drop in UK electricity prices after the government freed up the wholesale market last year.

The price slump took its toll on TXU's flagship UK operation, which had signed up to fixed-price power purchase contracts with other generators.

TXU's shares have fallen by nearly 70% on the New York stock exchange since the problems at its European arm began to emerge at the start of October.