A profit warning from IT and engineering company Siemens has been issued after the Department of Work and Pensions (DWP) cancelled an €85m (£65m) IT services contract with the company.

Siemens said earnings for the quarter would be €900m (£692m) less than expected due to the cancellation and other problems in its power generation division.

Siemens won DWP contract for a payments system in early 2006 and was due to develop the software as well as provide ongoing management and maintenance through to 2010.

But the UK government cancelled the contract because of problems with the timetable.

The project was due to be completed by October 2006 - but is now unlikely to be finished until December 2010.

And costs have run to 70 per cent over the initial £90m budget, with an estimated final cost of £153m.

The contract cancellation may mean further problems for Siemens in the future, according Georgina O'Toole, analyst at Ovum.

"Siemens was hoping to use its experience at DWP to offer similar solutions to client recipients of DWP such as Jobcentre Plus and other organisations such as HM Revenue and Customs and the Department for the Envrionment, Food and Rural Affairs," she said.