The share price fall came despite the unveiling of a 2% increase in operating profits to �1.13bn ($1.79bn) for the past year.

And there was bad news for Pru policyholders, as the firm trimmed bonuses on long-term savings products.

The firm said the action was needed as the market downturn has caused the FTSE 100 index of leading UK shares to fall by 43% over the past three years.

Insurance sector suffers

There had been speculation that the Pru may cut its dividend this year, but the company increased it to 26p from 25.4p.

This year, it is clear that stock markets around the world continue to be volatile and consumer confidence has deteriorated Jonathon Bloomer, Prudential group chief executive

But it warned shareholders the dividend may not continue to rise.

"While recognising the importance of cash payments to shareholders, the board believes that it would be inappropriate to recommit at this time to the current dividend policy," said chairman David Clementi.

"We must retain our financial flexibility when determining the 2003 dividend."

Investors saw this as a sign that the dividend was set to be trimmed, and sent Prudential's shares down by 21% to 310p at one point on Tuesday.

The stock ended down 69.25p, or 17.6%, at 323.75p.

The news from the Pru sent jitters across the insurance sector, and Royal & Sun Alliance, Aviva, Legal & General and Friends Provident all saw steep falls in their share prices.

Bonuses cut

The insurance sector as a whole has suffered from the falls in the stock market over the past few years which have reduced the value of the industry's financial reserves.

As a result, most of major insurers have cut bonus payments to with-profits policies - which aim to smooth out the peaks and troughs of share price movements.

Prudential unveiled more bad news for policyholders on Tuesday.

It said bond holders would get a regular bonus of 3.25% this year, compared with 4% in 2002.

Personal pension customers would get a regular bonus of 3.5%, compared with 4.5% a year previously.

Final bonuses were also cut, with Prudential saying the claim values would be reduced by "no more than" 12% for pensions and 10% for other products.

Uncertainty persists

"2002 was a tough year, with market confidence being adversely affected by increased political risk and a deteriorating economic outlook," Jonathon Bloomer, group chief executive.

"This year, it is clear that stock markets around the world continue to be volatile and consumer confidence has deteriorated."

Total insurance and investment sales across the group grew 29% to �27.6bn last year.

But while new business profits rose 15% to �774 for the group as whole, in the UK they fell 9% to �222m.

"We believe that the UK market for long-term savings will continue to be difficult in 2003," the company said.