May 8 (Bloomberg) -- Toyota Motor Corp. fell the most in two months in New York trading after quarterly net income dropped more than analysts estimated and the company forecast its first annual profit decline in a decade on a shrinking U.S. market and stronger yen.

``We are facing a severe business environment,'' President Katsuaki Watanabe said today. The world's second-biggest automaker said fourth-quarter net income decreased 28 percent and forecast a 27 percent slump in earnings this year.

Toyota joins Honda Motor Co. and Mazda Motor Corp. in predicting lower annual profit this year as the yen's 15 percent gain against the dollar in the past 12 months erodes the value of sales in North America. Watanabe projected sales of Corollas, Avalons and other vehicles in Toyota's biggest market will decline 6.4 percent in the fiscal year that ends March 31.

``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.''

The Toyota City, Japan-based company's American depositary receipts fell $4.36, or 4.2 percent, to $100.40 at 1:24 p.m. in New York Stock Exchange composite trading after tumbling to $99.25 earlier, for their biggest decline since March 14.

The shares were down 1.8 percent on the Tokyo Stock Exchange before the earnings were released. Toyota slumped 18 percent in the first three months, the largest quarterly drop in more than six years.

Fourth-quarter net income declined 28 percent to 316.8 billion yen ($3 billion) from 440 billion yen a year earlier, Toyota said in a statement today. Sales rose 3.8 percent to 6.57 trillion yen. Profit missed the 375.2 billion yen median of six analyst estimates compiled by Bloomberg.

Profit Drop

The carmaker predicts net income will drop to 1.25 trillion yen in the year started April 1, from a record 1.72 trillion last year. Operating profit may fall 30 percent to 1.6 trillion yen. The stronger Japanese currency will probably trim 690 billion yen from operating profit, the company said.

Toyota, vying with General Motors Corp. to be the world's largest carmaker, boosted U.S. retail sales in April 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 GM and Ford Motor Co. pick-ups because of record fuel prices.

Toyota, which gets about 50 percent of operating profit from North America, based its earnings forecast on exchange rates of 100 yen to the dollar and 155 yen to the euro compared with 114 yen to the dollar and 162 yen to the euro last fiscal year. Every 1 yen gain against the dollar and euro trims Toyota's annual operating profit by 40 billion yen and 6 billion yen, respectively, the company said today.

``It's now time to readjust our structure after having years of constant growth,'' Watanabe said at a Tokyo press conference. ``It's a golden opportunity to eliminate waste'' in the company.

Hybrid Cars

The overall U.S. market dropped 8.1 percent in the three months ended March 31. 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.

``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.

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.

U.S. Outlook

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.

Toyota will delay opening its eighth North American factory, Senior Managing Director Takeshi Suzuki told reporters in Tokyo. The company originally planned to start production of Highlander sport-utility vehicles at the plant by 2010, it said last year.

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 period. Sales in China will rise 36 percent to 640,000 vehicles this fiscal year.

Toyota's budget for research and development will fall 4 percent to 920 billion yen. Its capital spending will also drop 5.4 percent to 1.4 trillion yen. The company will raise its annual dividend by 17 percent to 140 yen a share from 120 yen.

Higher Prices

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.

To contact the reporter on this story: Naoko Fujimura in Tokyo at nfujimura@bloomberg.net; Tetsuya Komatsu in Tokyo at tekomatsu@bloomberg.net.

Last Updated: May 8, 2008 13:54 EDT