Pearson’s underlying pre-tax profit fell to £386 million for 2004 on sales down 3.2 per cent at £3.91 billion.

The company, which relies on America for most of its takings, blamed the fall in sales largely on the weakness of the dollar. Excluding foreign exchange rate changes revenues grew by 3 per cent.

However, the company also admitted that, even excluding currency fluctuations, operating profits at the Penguin division had fallen by 24 per cent to £786 million after a "sharp" deterioration in the American consumer books market in the last six months of 2004.

The adult mass book market shrank by 13 per cent in the half, with Penguin preparing for a further decline. "Penguin is adjusting its business and publishing plans accordingly," Pearson said.

Beside focusing on the premium market, the publisher was cutting costs and researching ideas for improving sales of the back list, on which margins are high.

Penguin’s decline more than offset an 69 per cent rise to £86 million in underlying profits at the FT Group newspaper arm, helped by cost cuts and a "more stable business advertising environment".

The Financial Times newspaper, where annual costs have been cut by one-third since 2000, achieved its first year of revenue growth in four years and returned to the black in the last quarter, typically a strong period for the title.

The newspaper, which has reported a 3 per cent rise in advertising takings so far this year, was on track to break even over 2005 after losing £9 million last year.

Pearson also reported a £29 million fall, to £293 million, in profits at its education business, the group's largest, with the weak dollar and a weak American schools market blamed for the decline. However, the company foresaw a revival in the business as healthy state budgets and federal spending revived the US school publishing and testing market.

"We continue to expect strong growth at Pearson Education and the Financial Times Group, and we are confident that our performance will be within market expectations, even while we tackle some challenges at Pearson," Marjorie Scardino, the Pearson chief executive, said.

Pearson shares stood 14p lower at 638p in afternoon trade.

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