Yahoo has announced disappointing quarterly financial results and revealed that the feared job cuts will be much worse than expected.

The company reported that third-quarter profits slumped by 64 per cent to $54.3m compared with $151.3m last year. Yahoo plans to cut 10 per cent of its workforce, more than 1,500 people, 50 per cent higher than expected.

"The steps we are taking this quarter should deliver short-term benefits to operating cash flow, and substantially enhance the nimbleness and flexibility with which we compete over the long-term," said Jerry Yang, co-founder and chief executive of Yahoo.

Falling consumer spending hit Yahoo's profits hard in the last quarter, but the company hopes that the job cuts and other belt-tightening initiatives will save the company $400m.

More job losses are also expected among Yahoo’s staff of contractors, which number 2,000, according to the company. It will also attempt to make savings in reducing the amount of property it holds.

"We are conducting a deep review of our cost structure to identify more opportunities to enhance efficiency and build a stronger and more profitable Yahoo," said Yahoo president Sue Decker.

Yahoo's results contrast with those of Google, which were upbeat despite the spending squeeze.

The news will also be troubling for those who invested heavily in Yahoo stock, such as Carl Icahn and oil speculator T Boone Pickens, in the expectation that the company would be sold to Microsoft.

Shares in Yahoo rose slightly to more than $12 at news of the job cuts, but are still nearly half as valuable as they were at the start of the year.

Under the circumstances Yang may face legal problems after the news that he turned down an offer of $40 per share from Microsoft last year.