Toyota Motor Corp., the world's second-largest automaker, said fourth-quarter profit dropped more than analysts estimated and forecast earnings this year will fall 27 percent due to a stronger yen and U.S. sales slump.

Net income fell 28 percent to 316.8 billion yen ($3 billion) in the three months ended March from 440 billion yen a year earlier, Toyota said in Tokyo today. That was lower than the 375.2 billion yen median of six analyst estimates compiled by Bloomberg. Sales rose 3.8 percent to 6.57 trillion yen.

Toyota, Honda Motor Co. and Mazda Motor Corp. all predict profit will drop this year as the yen's gains against the dollar erode the value of sales in North America. Chief Executive Officer Katsuaki Watanabe forecasts sales of Corollas, Avalons and other vehicles in the U.S. to drop 6.4 percent amid a ``severe business environment.''

``The slowdown in the U.S. really hit Toyota,'' said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments Ltd. in Tokyo, which oversees $28 billion in assets. ``The market has yet to hit bottom.''

Profit Drop

The carmaker predicts annual net income to drop to 1.25 trillion yen in the year started April 1, from a record 1.72 trillion last year, it said today. The stronger Japanese currency will probably trim 690 billion yen from operating profit, it added.

Toyota based its earnings forecast on exchange rates of 100 yen to the dollar and 155 yen to the euro. Every 1 yen gain against the dollar and euro trims Toyota's annual operating profit by 35 billion yen and 5 billion yen, respectively, according to the company.

The overall U.S. market dropped 8.1 percent in the first quarter. The price of regular gasoline gained 8 percent to $3.29 a gallon in the period and cost $3.62 a gallon as of yesterday.

The Toyota City, Japan-based company's shares fell 18 percent in the three months on the Tokyo Stock Exchange, the largest quarterly drop in more than six years. The shares fell 1.8 percent to 5,480 yen at the close of trading in Tokyo today before the earnings were released.

``I expect more bad news from the industry,'' said Edwin Merner, president of Tokyo-based Atlantis Investment Research Corp., which manages $2 billion in assets. Still, ``Toyota should come through this period stronger and better'' because of its lead in gasoline-electric hybrid technology.

April Sales

In April, Toyota boosted U.S. retail sales for the first time in five months on demand for the Yaris and the Prius. U.S. drivers are picking fuel-efficient Toyota models over General Motors Corp. and Ford Motor Co. pick-ups because of record fuel prices.

GM reported a first-quarter loss of $3.25 billion last month because of deteriorating performance in North America. The Detroit-based carmaker was profitable in every other region. Ford reported a surprise profit for the quarter as earnings from Europe offset losses in North America.

Demand for fuel-efficient vehicles, particularly in the U.S., has helped Toyota boost net income every year since it began reporting under U.S. accounting standards in the year ended March 2004. This calendar year, rising job insecurity may cause auto sales in the U.S. to slump to the lowest since 1995, according to Standard & Poor's.

U.S. Outlook

The carmaker forecasts its North American sales will drop to 2.77 million vehicles this fiscal year from 2.96 million last year. Global sales will rise about 1.7 percent to 9.06 million vehicles for the full fiscal year.

Toyota plans to raise prices for models including the FJ Cruiser sport-utility vehicle, Yaris compact and Prius hybrid by as much as 2.1 percent in North America later this month to help offset rising materials costs.

Nippon Steel Corp. and JFE Holdings Inc., Japan's two biggest steelmakers, raised wholesale sheet steel prices 25 percent last month to cover an unexpected tripling in annual coking coal prices. They are seeking a further 10 percent increase as early as June, traders familiar with price talks said on April 22.

Nissan Motor Co., Japan's third-largest automaker, is due to give its forecast and fourth-quarter earnings on May 13.