Anaemic sales growth of 3 per cent to $21.8 billion, which missed analysts' forecasts for sales of $22.4 billion, overshadowed an 18 per cent profit growth that met expectations.

"While the rate of growth for revenue continued to improve in the third quarter - it was not at a pace that we wanted," IBM chief financial officer John Joyce said in a conference call.

In after-hours trading, IBM shares fell $13, or 12 per cent to $100 after its regular session close, according to Island ECN. If that share price fall continues into regular trade on Wednesday, it would single-handedly knock 77 points off the Dow Jones Industrial Average.

"Revenues aren't where they need to be. On the outside itlooks like they have some explaining to do," JP Morgan analyst Daniel Kunstler said.

The Armonk, NY-based company reported third-quarter net income of $2.0 billion, or $1.08 per share, compared with net income of $1.70 billion, or 90 cents per share, a year ago, excluding one-time gains. The current-year results met the analysts' consensus estimate of $1.08 per share, as compiled by research firm First Call/Thomson Financial.

Mr Joyce declined to specify what kind of sales growth IBM could see in the fourth quarter, only saying that sales would be stronger than in the third quarter. This was a step back from earlier guidance of at least 10 per cent revenue growth, analysts said.

"Clearly there was a more cautious tone," said Sanford C Bernstein analyst Toni Sacconaghi. "They didn't come out with full confidence for the fourth quarter."

A weak euro hurt sales growth by reducing the total amount of revenues, when converted back into dollars, IBM said. Without the currency effect, sales would have risen 6 per cent. In the third quarter of 1999, IBM reported sales of $21.14 billion.

Mr Joyce said the effect from Europe's unified currency could be even greater in the fourth quarter.

"The impact in the fourth quarter may well be larger - not only due to the possible larger year-to-year drop in the euro - but also due to its rapid rate of decline that did not provide opportunities to hedge at rates that would have totally offset currency loss," Mr Joyce said.

Big Blue, which reported at least one bright spot in bringing its personal computer business back to profitability, said in a statement that third quarter sales were held back by three factors.

"Demand for our microelectronics products ... far out stripped our ability to supply components," IBM chairman and chief executive Louis Gerstner said in a statement. "Second, the upcoming release of our new high-end server slowed demand for our System 390 family of servers."

"Finally, parts of our software business slowed unexpectedly in September," he added.

Orders for the mainframes slowed more than expected ahead of the introduction of its seventh generation of its flagship 390 mainframe computer system, which it announced October 3 and which Joyce said IBM was "on track" to ship in mid-December.

"In the later stages of September, new orders in the pipeline started to slow, and some existing orders were even deferred," Mr Joyce said of demand for its mainframe computers.

Software revenues fell 3 per cent to $2.9 billion. Hardware sales were up 4 per cent to $9.5 billion, while Global Services revenues were also up 4 per cent, to $8.2 billion.

"Our software sales teams did not execute and did not close the business in the pipeline at the end of the quarter. Also, growth in our Tivoli Systems Management software was particularly disappointing," the IBM CFO said.

On a regional basis, IBM said revenues from Europe were down 3 per cent to $5.6 billion, while those from the Americas were up 1 per cent to $9.7 billion.

The company's gross profit margin was 35.8 per cent, flat compared with a year earlier.

IBM's financial report had been anxiously awaited by investors who in recent weeks have been battered by earnings warnings from top technology players. Analysts said that strong results from IBM could restore faith in a weary market.

Shares of IBM, which reported after the close of trade, closed up $1-7/8 at $113 in regular trading on the New York Stock Exchange on Tuesday.