A WARNING about the profit outlook from International Business Machines (IBM) helped to send New York share prices sharply lower last night, with the Dow Jones index closing more than 70 points lower at just over 5550. A large part of the drop was accounted for by a $10.50 drop in the IBM share price to $105.25 after results showing a 40 per cent drop in first quarter profits to $774 million (£496 million).

The main reason for the decline in the IBM share price and the Dow index was a warning from the computer giant about the impact of a strong dollar on its export earnings, which analysts said was also an issue for many other US companies. IBM warned that the rising dollar could knock as much as 25 cents a share off earnings for the second quarter. This is a big issue for many US companies and caused profit taking on US share markets.

IBM's first quarter profits, equal to $1.41 a share, were down from $1.3 billion, or $2.48 a share, in the 1995 quarter.

The computer giant said the weaker results, due to the costs of an acquisition and staff reductions, came despite a 5.7 per cent gain in revenues to $16.6 billion up from $15.7 billion.

IBM also announced that it was increasing its quarterly dividend to 35 cents a share from 25 cents.

Excluding one time charges of $435 million for its acquisition of Tivoli Systems and $236 million for staff reductions, IBM earned $1.4 billion, or $2.48 a share, in the period. Wall Street analysts had expected IBM to earn $2.41 a share, according to an average of estimates compiled by First Call, which monitors investment industry earnings estimates.

"We turned in a good but uneven performance," said IBM chairman Mr Louis V. Gerstner jnr. He noted that revenues grew in all geographical areas, with services revenues up 31 per cent. The merger with Tivoli was completed and will be a critical part of IBM's software business, Mr Gerstner said.