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Music retailer HMV issued a profits warning this morning after Christmas trading failed to end its recent malaise.

In the 26 weeks to October 28th the group made an operating loss of £24.5 million, compared to a £2.8 million profit in the same period in 2005.

While £4.2 million was due to one-off costs, competition on price and the growing popularity of digital downloads appears to be biting hard.

The group would have been hoping for a festive fillip, but warned this morning that margins in its UK and Ireland HMV outlets were likely to be down by around 30 per cent.

This was a despite a modest increase in sales.

"The markets in which we operate continue to be very difficult," admitted chief executive Simon Fox. "However, we delivered an improved performance at Christmas, particularly at HMV UK where we achieved strong gains in market share.

"The actions the group has taken to improve its competitive position are yielding benefits, but these are not sufficient to offset the profound changes taking place in our markets."

Group sales were 10.3 per cent in the period to the end of October, driven by the improved performance of Waterstones.

The bookseller saw sales growth of 39.2 per cent after the acquisition of rival Ottakars.

HMV shares were down 11.29 per cent during early trading.