High costs offset a rise in sales, BMW chief Helmut Panke said

Pre-tax profits for the three months to September fell to 647m euros ($776.6m; �438.9m) from 779m euros last year.

The company blamed tough competition, rising raw material costs and a one-off 175m euro hit from a Rolls Royce bond.

Rival Volkswagen (VW) said improved cost savings and an increase in sales had helped lift third-quarter operating profits by almost 50% to 586m euros.

The results were boosted by savings from VW's "ForMotion" restructuring programme which the firm says is on track to deliver savings of 3.1bn euros by the end of 2005.

In September, the firm revealed it was shedding thousands of jobs through voluntary redundancy and natural wastage.

Looking ahead VW warned that the rising cost of raw materials would squeeze profits, while high oil prices were likely to "dampen consumer demand".

Costs warning

Rising costs were also a factor in BMW's disappointing results.

Despite the dynamic growth of sales volumes and extensive measures to improve efficiency, the impact of these external factors could not be fully offset BMW Check BMW's shares Check VW's share price

"Currency factors, high raw material prices and intense competition are all having an adverse impact," said BMW chief executive Helmut Panke.

Increasing demand from China has driven up the price of raw materials which has hit margins, while Asian carmakers are grabbing an ever larger share of the motor vehicle market.

"Despite the dynamic growth of sales volumes and extensive measures to improve efficiency, the impact of these external factors could not be fully offset," BMW added.

New models had helped to boost sales by 15% to 341,932 vehicles during the quarter, with its BMW, Mini and Rolls-Royce brands driving the rise.

However, the group also said it had taken a 175m euro hit during the quarter from a loss on a bond option from its investment in aircraft engine maker Rolls Royce.

BMW is to redeem the 2003 bond with shares in Rolls-Royce. However as Rolls shares have surged recently it means the cost of redeeming the bond is much higher than expected.

'Very disappointing'

Looking ahead the firm said it expected full year earnings to come in at about the same level as last year when it posted pre-tax profits of 3.55bn euros.

On Monday, the carmaker denied press reports that chief executive Helmut Panke had hinted annual profits could come in as much as 10% down on last year.

However, analysts were not so sure about the company's prospects, with Dresdner Kleinwort Wasserstein dubbing its latest results "very disappointing".

"It is just impossible after this very weak quarter to maintain their (annual) profits," said Dresdner Kleinwort Wasserstein analyst Jens Schattner.