Dreamworks' shares are now lower than their debut price

The US animation studio - famous for its Shrek films - sank 14.55%, or $3.90, to $22.91 in late US trade.

It blamed higher-than-expected home video returns for a cut in second quarter forecasts from break-even to a loss of 7 to 9 cents per share.

Market watchdogs have begun an informal probe of its securities, it added.

Dreamworks said it was complying voluntarily with a request from the Securities and Exchange Commission (SEC) concerning the trading of its stocks and the release of its results for the first three months of the year.

But it stressed that the SEC request did not mean it had broken any laws.

Sales slide

As well as cutting its profit forecasts for the second quarter, the group also warned full-year earnings were likely to come in at 80 to 90 cents, rather than the $1 to $1.25 it had previously expected.

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Dreamworks - whose most recent box office hit is Madagascar - said the news had followed a review of its current sales and stockpiles.

Some analysts have said the fall in sales reflects a shift in the DVD market.

While overall sales have risen, studios are releasing more titles which are now having to compete for shelf space in stores. As a result, instead of reducing the price of films in sales, shops are now quicker to return unsold goods to the studios.

Last month, rival animation studio Pixar cut its profit forecasts saying it had been hit by weaker than expected sales of The Incredibles.

New trend?

"It's too early to come to any conclusions," Dreamworks chief executive Jeffrey Katzenberg said.

"There is a tremendous amount of product in the marketplace. It's obviously much more crowded than it has been before. We don't know if this is a short-term issue of if some larger shift is going on."

Dreamworks also announced it had decided to cancel a planned $500m (�416m) secondary offering of its stock.

The warning was the second from the company in recent months - in May it warned that poor video sales of Shrek 2 would hit its full year profits.

The company has also been hit by disappointing sales of Shrek 2 DVDs, while takings for its latest release Madagascar were weaker-than-expected.

Dreamworks shares rose more than 52% when they floated at a price of $28 per share on the New York Stock Exchange in October last year.