DEFENCE giant BAE Systems has reported a drop in annual sales after military spending in the US and UK was cut.

Revenues fell 14 per cent to £19.2 billion in 2011. Underlying profits dropped seven per cent to £2 billion.

The company said its order book also declined by eight per cent to £36.2 billion and warned sales will not grow this year.

The group said defence spending has reduced in its largest markets - the UK and the US - while it was also hit by a delay in an order for Eurofighters to Saudi Arabia.

BAE is also likely to see its Eurofighter consortium fail to land a large contract to supply fighter jets to India after a French rival was named preferred bidder.

The fuselage of the the Typhoon is assembled at BAE’s plant in Samlesbury, with final assembly at Warton – two sites undergoing consultation for 1,400 job losses.

The company also signalled the end of production at its factory in Brough, Yorkshire, as part of a round of 3,000 redundancies at sites across the UK as it adjusts to the difficult climate.

Chief executive Ian King said that BAE was in discussions with its other partners in the consortium and would consider dropping its price.

But he added that they were 'not going to do anything for stupid margins'.

The group hopes to wrap up a key Saudi Arabian fighter jet contract, while it was also in discussions to supply Oman.

Mr King said the company's earnings performance represented the underlying resilience of its business as it looked to focus more on fast growing nations such as India.

Bottom-line profits rose four per cent to £1.5 billion, helped by a £197 million tax rebate.

Shares fell four per cent even though it increased its dividend by seven per cent as a sign of its future confidence.

Mr King refused to comment on reports that the company's top three executives are set to receive multimillion-pound bonuses and share awards.