NEW YORK (Reuters) - Microsoft Corp stunned Wall Street with disappointing results that included plans to slash up to 5,000 jobs and a warning that profit and revenue will almost certainly drop over the next two quarters.

The news from the world’s largest software maker, which had not been expected to report results until after the close of trading on Thursday, sent shock waves across financial markets, pulling down the Nasdaq, and sending U.S. Treasury debt prices higher as investors sought safer assets.

Microsoft’s shares dropped as much as 11 percent to their lowest level since January 1998, adding to a 40 percent decline in the past year.

The company blamed the miss on the weak PC market and the popularity of low-cost netbook computers, which have combined to badly undercut sales of its Windows operating system.

“Our financial position is solid ... but it is also clear that we are not immune to the effects of the economy,” Chief Executive Steve Ballmer told employees in a letter. “Consumers and businesses have reined in spending, which is affecting PC shipments and IT expenditures.”

The market has become so volatile, Microsoft cautioned, that it will not issue earnings or revenue forecasts for the rest of its fiscal year ending June 30, 2009 -- other than to predict both will very likely be lower.

“It is pretty bad when things are deteriorating so fast that even the largest companies in the world don’t know how rapidly it is happening,” said Jefferies analyst Katherine Egbert.

Microsoft posted a profit of $4.17 billion, or 47 cents per share, in its fiscal second quarter ended December 31, versus a profit of $4.71 billion, or 50 cents per share, a year earlier. Analysts were looking for earnings of 49 cents per share, according to Reuters Estimates.

Revenue rose 2 percent to $16.63 billion, missing the average analyst forecast of $17.1 billion.

Sales in the Windows segment fell 8 percent, while its Business division, responsible for the Office software package, marked a 1 percent increase. Revenue at the unit that makes the popular 360 Xbox gaming system rose 3 percent.

Looking ahead, the Windows business is expected to perform in line with the weak traditional PC market, Microsoft said.

BIGGEST JOB CUTS EVER

Microsoft’s staggered elimination of 5,000 jobs -- 1,400 immediately and the rest over 18 months -- amounts to about 5 percent of its estimated 96,000 work force, the biggest reduction ever by the software maker. Other cost cuts include travel and marketing budgets, and the roster of independent contractors.

“Clearly business conditions are worse than people were expecting,” said Richard Williams, analyst at Cross Research. “This is a substantial amount of jobs cuts. Microsoft has never had a layoff like this in my knowledge and it’s sending a signal that the times are definitely changing.”

The job cuts follow similar moves by other technology firms, including AT&T Inc, Dell Inc, Motorola Inc and Advanced Micro Devices Inc, all of which are suffering from the global economic slowdown.

Microsoft faces a shift by PC buyers to netbooks, which are smaller, stripped-down laptops. Microsoft only gets $60 or less for each sale of Windows for a netbook, compared to $90 for traditional laptops, according to Enderle Group analyst Rob Enderle. Some netbooks also use the rival open-source Linux software instead of Windows.

On a conference call, Ballmer said Microsoft also lost market share to Apple Inc, which on Wednesday posted surprisingly strong results. Ballmer, whose public histrionics often overshadow a sharp intellect and gift for numbers, was serious in tone.

Microsoft CEO Steve Ballmer delivers the pre-show keynote address at the annual Consumer Electronics Show in Las Vegas, January 7, 2009. REUTERS/Rick Wilking

“We are certainly in the midst of a once-in-a-lifetime set of economic conditions,” Ballmer said, adding that the company is “dealing with unprecedented ground.”

As for the economy, Ballmer said he did not expect a quick rebound.

Still, Ballmer noted that Microsoft will be adding “thousands of jobs” in strategic areas like Internet search, where it has been lagging behind Google Inc, and that he still desires a search partnership with Yahoo Inc.

Ballmer said the result of the job cuts and additions would be an overall staff reduction of 2,000 to 3,000 positions.

But Chief Financial Officer Chris Liddell said he does not expect significant acquisitions this year, despite hopes from some Yahoo shareholders for a buyout.

Shares of Microsoft were down $2.13 at $17.25, after touching an intraday low of $17.17, the weakest level since January 1998. It was the biggest single-day drop in the stock since an 11.38 percent fall on April 28, 2006.