PEARSON, the publisher of the Financial Times and a bellwether of the media sector, saw its shares drop by more than 3% yesterday after warning that advertising revenues at the FT would be some 15% lower in 2003 than last year, after a challenging year for its business titles.

The fall, however, slowed in the second half to 12%, with signs of stabilisation in some advertising categories including recruitment, corporate results, and transactions, and online.

Pearson, which also publishes text books and novels, said in a pre-close trading update that advertising revenues across its business newspapers continued to be erratic, although the FT had recorded modest growth in September and a good performance in the US.

Pearson added that it was on course to meet group-wide earnings targets for this year with further growth also expected in 2004.

Profits at the FT Group are likely to be ''slightly ahead'' of last year, with ongoing cost reductions forecast to boost profits in 2004.

Pearson said the division had reduced its cost base by around (pounds) 15m this year, with half of that figure reinvested in the newspaper. Since 2000, the FT has reduced costs by around (pounds) 100m.

In Pearson's Penguin publishing division, underlying revenues are expected to increase by between 1% and 2% this year with another strong publishing schedule set to further boost the business in 2004. The education division, which covers testing and assessment services and online learning, said its school and higher education businesses were set to report underlying progress on revenues and profits.

However, the professional division will be significantly lower than last year because of the loss of a major contract.

Pearson said that as it generates 70% of revenues in the US, the weakening of the dollar will reduce reported adjusted earnings per share by around 2p.

The group said: ''Though market conditions remain tough for corporate advertising and technology-related businesses, we continue to perform strongly in our markets and are benefiting from further efficiency gains.''

On the outlook for 2004, Pearson said it expected ''a significant profit improvement as our business newspapers benefit from continuing cost reductions''. It said Penguin was on track to grow faster than the consumer publishing market, while in education it expects the US school publishing industry to ''decline in the mid-single digits ahead of a significant rebound from 2005 onwards''.

The shares were down 13.25p at 617p.