Shares in Empire Online lost further ground this morning after the online gaming firm warned that a sea change in its relationship with market leader PartyGaming would knock 10 per cent off its expected after-tax profits for the full year.

Having lost more than 7 per cent of their value in the immediate aftermath of this morning's warning, Empire Online stemmed some of the early losses to stand just over 4.5 per cent lower at 93.5p after the first hour of trading.

Having stated last week that it was too early to quantify the impact of PartyGaming's decision to ringfence the punters who use its sites from those of the "skins" that traditionally direct traffic towards them, Empire Online said it had now seen a slowdown in the "rake" or commission generated by its EmpirePoker.com website.

"The company now expects Empire Online's net profit for 2005 to be approximately 10 per cent lower than consensus market estimates for the 12 months ended December 31 2005," it said.

Shares in PartyGaming and smaller rival Sportingbet also shed value as the volatile sector threatened to take another pounding on negative revenue news from one of its members.

But Empire Online, which also operates Noble Poker and Club Dice, maintained that aside from this, new player sign-ups across its network as a whole "remained strong".

It said that, although profits growth would be lower than expected, it would still be "substantial" in 2006 and beyond.

"The impact on Empire Online [of PartyGaming's move] is on the value of the existing customer database of EmpirePoker.com and not on the value and number of new sign-ups across the Empire Online network. The company will take all measures to protect its revenues and continue the strong growth in new player sign-ups reported in the Q3 trading update," it said.

Investors were also reassured by positive comments from Empire's chief executive Noam Lanir, who expressed strong confidence in the company despite today's negative news on profits. Mr Lanir also raised the prospect of Empire Online playing an active part in the merger fever expected to grip the sector over the coming months.

He said: "The trend rate of growth at Empire Online remains strong and we will continue to grow ahead of the industry. Due to the talent of the team in place at Empire Online and the opportunities for organic growth and the consolidation in the industry I am very confident of the enduring future of this company."

Having attracted investors in droves earlier this year - attracted by the bumper growth prospects on offer for online gambling - the sector has suffered heavy losses in recent weeks as some of the previously heady optimism begins to fade.

The beginnings of the rout first game in August, when PartyGaming - an instant member of the FTSE 100 after its float just weeks before - warned about the pace of future growth.

Since then, even a minor piece of potentially bad news in the sector has been enough to send investors running for the exit.

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