Glaxo has always defended the troubled Avandia drug

The UK-listed company said that it was seeing lower demand for diabetes pill Avandia after a US study linked it to a greater risk of heart attacks.

Greater competition from other generic drugs would dent profits, it added.

Sales in 2007 fell by 2% to �22.7bn. Glaxo said they would have grown by 19% were it not for the Avandia woes.

The shadow of Avandia will continue over us in 2008 and make life a little bit more difficult Jean-Pierre Garnier Chief executive GlaxoSmithKline Check Glaxo shares

Annual revenues from the Avandia products fell to �1.2bn in 2007, from �1.6bn in 2006.

The firm has insisted that the benefits of the drug outweigh associated risks but chief executive Jean-Pierre Garnier said that it would take time to win back confidence.

"The shadow of Avandia will continue over us in 2008 and make life a little bit more difficult for us," he said.

"But underneath all this you have a very strong business."

Uncertain prospects

Glaxo shares closed down 7.6% to 1078p, having slumped 10.5% at one point to their lowest level since 2004.

Declining margins in the fourth quarter, a US tax bill of an extra $680m (�349m) and little good news about other drugs in development all combined to disappoint analysts.

Observers say that Glaxo's short-term prospects are uncertain, with investor confidence dented by delays to new drugs including cervical cancer vaccine Cervarix.

It will also lose patent protection on several central nervous system drugs this year, they say.