A sharp drop in bond trading revenue pushed Citigroup Inc fourth-quarter profit far below expectations, highlighting Chief Executive Vikram Pandit's challenges in fully reviving the bank.

The earnings miss by Citigroup, which only survived the financial crisis thanks to a massive taxpayer bailout, stoked concern that the bank has yet to resolve the operational weaknesses that have plagued it for years.

Shares of the No. 3 U.S. bank -- which have rallied strongly over the past year as the U.S. government gradually sold off its stake in the bank -- were down 5.8 percent in morning trading.

The bank's fixed-income revenue alone dropped 58 percent from the third quarter -- compared to a 7.9 percent drop at larger rival JPMorgan Chase & Co, which reported its fourth-quarter earnings on Friday.

"This was one of the weaker quarters for trading," Chief Financial Officer John Gerspach told reporters in a conference call, acknowledging Citi's investment bank has also struggled in other areas like the M&A league tables.

But he argued that trading results tend to ebb and flow, adding that "one quarter doesn't make a trend." Gerspach also forecast that "key hires" made in 2010 would boost securities and trading performance in 2011.

He also said the poor performance had come despite relatively strong volumes.

The bank's weak trading results unsettled investors, who had been reassured by the slight drop at JPMorgan, ahead of other big bank earnings later this week including Goldman Sachs Group Inc on Wednesday, Morgan Stanley on Thursday and Bank of America Corp on Friday.

"There was some weakness in their investment banking unit, especially in terms of the trading unit," said Alan Villalon, an analyst at Nuveen Asset Management, in Minneapolis. "I expect that unit to be erratic, but the problem is we're following up with such strong numbers from JPMorgan that everyone was expecting Citi to post similar results."

"This highlights that Citi, over the last couple of years, they've been dealing with a lot of issues and they've lost a lot of people," he added.

Bank of America shares were 2 percent lower and the KBW Bank index fell 1.4 percent.

Citigroup, which took $45 billion in U.S. bailout funds during the financial crisis, reported a net profit of $1.3 billion, or 4 cents per share, for the fourth quarter. The EPS was 50 percent below what analysts had expected, according to Thomson Reuters I/B/E/S.

The bank's fourth consecutive quarterly profit compared to a year-earlier loss of $7.6 billion, or 33 cents per share. That loss was mostly caused by the costs associated with repaying the government under the Troubled Asset Relief Program.

Citigroup took a $1.1 billion hit to results, before taxes, because of a credit value adjustment. That adjustment -- which Gerspach said accelerated after the government finished selling its Citi stake -- is due to the bond market's perception that Citi's credit quality improved during the quarter.

Under accounting rules, that improvement forces the bank to take charges because its liabilities are theoretically worth more.

"Most people are still a little shell-shocked on this kind of accounting," Gerspach said.

Pandit has sold assets, laid off staff and tried to focus Citigroup on its main businesses, including investment banking and retail banking for affluent customers globally but the latest results show that his overhaul remains a work in progress.

In a memo to employees, Pandit predicted that 2010 would be remembered as "the year Citi turned the corner."

The Citi CEO, who has earned $1 in salary for each of the last two years but is due for a raise in 2011, also got a vote of confidence from prominent investor Prince Alwaleed bin Talal, who congratulated Pandit by phone on the bank's net profit of $10.6 billion in 2010, Alwaleed's Kingdom Holding Co said in a statement.

Citigroup released about $2.3 billion in reserves for bad loans, mainly due to an improvement in the store credit cards business it has put up for sale.

But a slump in Citigroup's securities and trading unit hurt revenues, which fell 6 percent on a managed basis from the third quarter to $18.4 billion and were also substantially below analysts' forecast of $20.4 billion.

"My guess is, Citi wishes they had more loan loss reserves that they could have released to get earnings. Eventually, you need real revenue growth if you're going to get profit growth, you can't just keep releasing reserves," said Matt McCormick, portfolio manager and banking analyst at Bahl & Gaynor.

It was the fourth consecutive quarterly profit for Citigroup, and its first since the U.S. government finished selling off its stake in the company last month.

Shares of Citigroup closed at $5.13 on Friday -- their highest close since August 2009. The bank's shares have surged 55 percent since the beginning of 2010, and gained additional momentum last month after the U.S. government sold the last of its stake.

(Reporting by Maria Aspan; additional reporting by Dan Wilchins; Editing by Dave Zimmerman)