Yahoo! is to cut 1,000 jobs - nearly 7per cent of its workforce - in the biggest round of job cuts at the US internet giant since the dot-com crash.

The group said that intense competition and falling advertising revenue meant that it had to make “profound changes” to the way it operates.

Yahoo! reported a 23 per cent plunge in fourth-quarter profits to $205.7million (£102.8million). Overall revenue rose 8 per cent to $1.83 billion. Its shares, which have halved since late October, yesterday fell nearly 9percent to $18.96.

Jerry Yang, the chief executive and co-founder, said that the company was facing “headwinds” that could last throughout 2008. He added that it needed to adjust to emerge stronger in 2009. “We are making profound, fundamental changes to virtually all aspects of our business,” he said. Redundancies had been seen as a foregone conclusion, with reports in the US this month that the company may lose as many as 2,500 staff.

Yahoo! has been hit hard by a decline in advertising spending across the financial, travel and retail sectors. Analysts believe that its larger share of the corporate display ad market make it more vulnerable than the likes of Google, whose model is based on receiving money each time someone using its search engine clicks on a company's advert.

Yahoo! said that the focus of its investment this year would be on creating a large-scale network for buying and selling online advertising to generate higher revenue next year.

Yahoo! has struggled in recent years against Google, whose share of the internet search market is more than three times as big and has also faced competition from social networking sites such as MySpace and Facebook, as well as other players in the online advertising market, including Microsoft.

Last summer, Terry Semel, its long-standing chief executive, stepped down and was replaced by Mr Yang, who promised a wide-ranging review after criticism that Yahoo! was trying to do too many things rather than focus on its core priorities. He has said that he will reject any attempt to take over the company or split it up.

Early last year Microsoft was reported to be considering a bid - possibly for as much as $50billion - in an attempt to rein in Google. There has also been speculation that News Corporation, parent company of The Times, has considered combining MySpace, its social networking site, with Yahoo! in return for a large share in the newly merged entity.

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