Yahoo!, the online search engine, is to slash 10 per cent of its workforce in a move to cut costs amid a plunge in advertising revenues.

The internet company said that it will sack at least 1,500 staff, around 500 more than it had estimated previously. It is not clear whether all the redundancies will be made in the US.

Yahoo! told shareholders that the global recession is already eroding advertising, the search engine's main source of income. As a result, profits for the third quarter of the year sank 64 per cent while sales over the period stagnated.

Net income for the third quarter tumbled to $54.3 million from $151 million while gross revenue inched 1 per cent higher to $1.79 billion compared with the same period a year earlier. While advertising revenue in the US actually rose by 7 per cent, overall international revenue plunged by 12 per cent.

Blake Jorgensen, chief financial officer, said: "An increasingly challenging economic climate and softening advertising demand contributed to revenues this quarter coming in at the low end of our outlook range."

The redundancies are expected to help Yahoo! save about $400 million so that it can also cope better with stiffer competition from Google, its bigger rival. Collins Stewart, the investment bank, told clients that it now expects advertising revenue growth at Yahoo! to fall below 20 per cent over the year, for the first time since 2002.

While Wall Street applauded the cost cutting - the shares jumped 8 per cent in after hours trading - analysts were shocked at Yahoo!'s warning that sales over the year as a whole could be as much as $200 million lower than expected. Wall Street had pencilled in gross sales for 2008 of $7.35 billion, but last night, Yahoo! warned that revenues could be as low as $7.18 billion.

Yahoo! is struggling to compete with Google, which in August, benefited from 63 per cent of all internet searches in the US. Yahoo! over the same period netted just 20 per cent of all searches. Because of Google's internet user base, it is able to attract more advertising onto its site and charge more for it. Yahoo! is heavily exposed to the slumping internet display advertising market, and is less efficient than Google at extracting profits from search adverts. Internet advertising is estimated to be worth around $40 billion a year, and had been expected to grow to $80 billion by 2010, before the US recession hit.

Jerry Yang, co-founder and chief executive of Yahoo! has had a bad year. At the end of February, Microsoft made a hostile approach to buy Yahoo! and continued to pursue the internet firm until May. Microsoft's offer - which valued Yahoo! at $47.5 billion - cost Mr Yang valuable time while he was trying to grow market share for the company.

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