Online advertising budgets have seen their smallest growth since 2003, according to a report by the Institute of Practitioners in Advertising.

The UK advertising trade body's quarterly Bellwether Report reveals that budgets were revised down for the first time in 12 months in the final quarter of 2007, the steepest fall in nearly two years.

The report attributes the fall to weaker than expected sales revenues, disappointing profits and concerns about the economic environment.

These factors led many companies to trim budgets in order to cut costs and maintain margins.

Although almost half of all companies have set their 2008 budgets higher than their 2007 actual spend, the report warned that downward revision should send a note of caution to businesses.

"The Bellwether Report reveals a marked deterioration in business conditions in the fourth quarter of last year, which companies responded to by trimming their marketing budgets causing 2007 to finish on the weakest note for two years," said report author Chris Williamson.

"Some positive news was provided by 2008 marketing budgets being set higher than actual spend in 2007, but we interpret this with caution.

"Companies will be monitoring the business situation carefully and, if trading conditions and business confidence fail to pick up in the new year, we can expect these budgets to be revised down as the year proceeds."

Although internet budgets, which now account for around nine per cent of total marketing spend, were increased to a greater extent than any other category, the rise was the weakest seen by the researchers since the third quarter of 2003.

Only 15 per cent of companies reported increasing total marketing budgets and 19 per cent reported a decrease. However, 23 per cent of companies revised up their budgets for the internet, while seven per cent saw a decline.

The Bellwether Report has now included online search in its research and saw the same pattern of upward revision as internet ad spending.