Microsoft is to cut 5,000 jobs, more than 5 per cent of its workforce, in the first company-wide cuts in its history.

The company posted disappointing results for its second quarter after sales of its dominant Windows operating system was hit by weakening demand for PCs.

The news from the world's largest software maker, which had not been expected to report results until after the close of trading In New York, sent shock waves across financial markets, pulling down the Nasdaq and the US dollar.

Microsoft's shares dropped as much as 11 per cent to its lowest level since January 1998, adding to a 40 per cent decline in the past year.

Last night the shares stood at $17.35, down 2.03.

The company said that the market had become so volatile, that it would not issue earnings or revenue forecasts for the rest of its fiscal year ending June 30, 2009 but warned that both were likely to be lower.

"It is pretty bad when things are deteriorating so fast that even the largest companies in the world don't know how rapidly it is happening," said Jefferies analyst Katherine Egbert.

The company announced that 1,400 jobs would go immediately from the total workforce of 96,000, with the rest being cut over the next 18 months. Posts will go in research and development, marketing, sales, finance, legal, human resources and information technology. The majority will go from its Redmond base near Seattle in Washington state. Up to 60 jobs are at risk in the UK from a workforce of about 2,900.

The company reported an 11 per cent drop in second-quarter profit. The company made a profit of $4.17 billion (£303 billion), or 47 cents per share, in its second-quarter ending December 31, compared with a profit of $4.71 billion, or 50 cents, a year earlier. Wall Street had been expecting earnings per share of 49 cents.

Mr Ballmer said the economy was "resetting" and he expected it to rebuild slowly from a lower base. "I am not expecting a bounce," he told analysts.

Microsoft said it had been hurt by deteriorating global economic conditions and lower revenue from software for PCs. The holiday quarter of 2008 was the worst the PC market had seen since 2002, with computer shipments declining about a half of 1 per cent, according to IDC, a technology research group.

The one PC sector which has seen rapid growth - low-cost and low-power netbooks - use older Microsoft Windows XP operating software and cut into other PC sales while contributing less to the company's bottom line. The company is due to launch its Windows 7 version in about a year's time, which it hopes will boost corporate software sales after the relative failure of Vista.

Explore Tech & Web

• Personal Tech

• The Web

• Gadgets & Gaming