BAE systemsA squeeze on military spending has hit BAE Systems after it reported a 10% drop in half-year revenues.

The group, which produces Astute nuclear-powered submarines and is the largest supplier of land vehicles to the US army, has suffered from cut-backs in transatlantic markets, while orders for Eurofighters to Saudi Arabia have been delayed.

This contributed to a fall in sales at one of the UK's biggest manufacturing employers to £8.3 billion in the six months to June 30, while underlying earnings fell 3% to £939 million.

However, the group said its order book grew by £900 million to £40 billion, driven by a £4.3 billion increase in demand from outside the UK and the United States.

Shares fell as the revenues figure was worse than the City had forecast, although earnings were slightly ahead of expectations.

Its main UK manufacturing division saw earnings lift 35% to £420 million despite a drop in sales, helped by building a new destroyer for the Royal Navy.

The increase in profitability is welcome news for the division after its shipbuilding operations were placed under review in a move that could result in the closure of its Portsmouth dockyard, threatening up to 3,000 jobs.

BAE is expected to cut more than 600 jobs at its factory in Brough, Yorkshire, home of the Hawk jet, as part of a round of redundancies at sites across the UK.

Investec analyst Andrew Gollan said BAE had put in a "steady performance in challenging markets". However, the group's Land & Armaments division saw underlying sales fall 26% as governments shrink the size of their armies and equipment in the wake of western forces withdrawing from Iraq.

BAE said the outlook for defence spending in the UK had stabilised, with the group currently working on new aircraft carriers for the Government and plans for the next generation of nuclear-armed submarines. But it warned further delays to next year's US military spending budget were likely in the wake of the presidential election.

More stories