VW car sales fell almost 2% last year

The German car giant blamed weak consumer demand and the strength of the euro for the warning that 2003 operating profits would fall short of last year's 4.76bn euros ($5.24bn; £3.3bn)

"Given present exchange rates ... and in the event that the market situation in Western Europe and the US does not improve, we will not be able to match the 2002 operating profit," chief executive Bernd Pischetsrieder said.

The warning initially sent VW shares down 10% to their lowest level since December 1996, and wiped almost 1bn euros off the firm's stock market value.

The stock had recovered by 1705 GMT to stand down 7.95% at 30.14 euros.

Shares in other European automakers were also lower, with Peugeot stock down 1% at 34.86 euros, and Renault shares 4% lower at 30.05 euros.

Brighter future

But Mr Pischetsrieder foresaw rosier trading in 2004, when cost cuts and new models would "reverse the picture".

"It is clear that 2004 will be a year that will benefit from new products without the substantial ramp-up costs we have had this year," he said.

And some investors expressed surprise at the stock market reaction to Tuesday's statement.

"There has been a lot of talk that VW will disappoint on the operating earnings side this year due to the big model cycle switch," said Trudbert Merkel, fund manager at Deka Group in Frankfurt.

"This is [a] long-awaited warning."