Amazon, the online retailer, reported a 17 per cent increase in sales in its fourth quarter to $2.98 billion (€2.48 billion), but saw its earnings fall as it continued to increase spending on free shipping offers and new technology.

Net income for the quarter was $199 million, or 47 cents a share, down from $347 million a year ago, with the drop due in large part to a reduced tax benefit compared to the previous year.

Wall Street analysts had forecast revenues of around $3.08 billion.

Jeff Bezos, Amazon's founder and chief executive, said that 2005 "was definitely a year when we increased our cost structure significantly. We did that deliberately, because we saw a lot of opportunity going forward. Over the next couple of years we'll see the utilisation of that structure."

Amazon introduced its Amazon Prime flat annual fee shipping service in the US in February last year, hoping to encourage online Amazon shoppers to spend more, and to shop across the full range of the company's offerings.

Tom Szkutak, chief financial officer, again defended the value of the Amazon Prime programme, saying that it and other free shipping initiatives had saved Amazon's customers $475 million in the financial year. The company said the number of subscribers to Amazon Prime doubled between November and December.

"It is great for customers, but it's certainly very expensive ... it's a long-term investment that we make that we think is great for customers and will be great for investors in the long term," he said.

Amazon has continued to expand US sales of higher margin electronics and other goods during the quarter, which accounted for 34 per cent of its US sales at $580 million, against 32 per cent a year ago. US sales of books and other media surpassed $1 billion for the first time during the year.

For the full year, Amazon's net sales grew 23 per cent to $8.49 billion in 2005. - (Financial Times service)