HSBC Holdings missed expectations with a $7.1 billion annual pretax profit as accounting losses masked record investment bank earnings and a late year slowdown in bad debts at its troubled U.S. business.

Profits by Europe's biggest bank in 2009 were down from $9.3 billion in 2008, missing an expected pre-tax profit forecast of $11.4 billion, according to the average forecast from analysts polled by Thomson Reuters I/B/E/S.

Shares in the bank fell as much as 3.2 percent to 696.8 pence by 0847 GMT (3:47 a.m. ET).

HSBC said on Monday that bad debt impairments rose 9 percent to $26.5 billion, broadly in line with the $26.9 billion expected by analysts. But the group said U.S. loan impairment charges improved and it now expects broader impairment charges to decline in 2010.

Profits were dented by a $6.3 billion technical accounting loss on the value of its own debt, more than the $5 billion expected by analysts. Underlying profit before that loss was $13.3 billion, up 56 percent.

HSBC's Global Banking and Markets investment banking arm saw pretax profit for the year rise to $10.5 billion from $3 billion a year earlier thanks to improved market conditions.

(Reporting by Steve Slater and Clara Ferreira-Marques)

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