Warner Music suspended its dividend yesterday in an attempt to preserve cash amid a grim second quarter.

The move to withhold the payout to shareholders scared investors, and the stock, traded in New York, plunged by as much as 20 per cent. Edgar Bronfman, chairman and chief executive, was also forced to admit that recorded music sales had effectively stagnated over the period and that losses had deepened twice as rapidly as expected.

He said: “We feel totally comfortable that we have the complete financial flexibility we need to meet our debt covenants going forward.”

The company, which owns the music of Madonna and REM, has blamed the slowdown in the US economy for its sluggish performance. Overall recorded music sales were almost flat in the quarter, rising just 0.6 per cent to $652 million (£333 million) compared with the same period the year before, as fewer customers bought CDs with the US sliding into a recession and increased demand for music downloaded from the internet.

Total revenue from digital music sales jumped by 48 per cent to $164 million, against $111 million for the same time last year, driven by music download purchases.

Mr Bronfman said: “Physical recorded music sales continued to decline industrywide and slowing ringtone growth, as well as a softening broader economy, are negatively impacting the music industry.”

For the overall three-month period, Warner Music declared an increased loss of $37 million, compared with a loss of $27 million for the same period the year before.

Sales increased by 2 per cent to $800 million. Losses per share were almost double Wall Street expectations.Sales for Warner's music publishing segment rose to $155 million, up 8 per cent compared with the same period the year before.

Mr Bronfman said that his recent joint venture with MySpace - owned by News Corporation, parent company of The Times - for music downloads will not see any meaningful returns until next year.

Shares in Warner Music managed to pare earlier losses and were down 12 per cent in lunchtime trading yesterday, at about $8. They had traded as high as $30 in mid-2006.

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