Infosys Technologies edged up its forecast on a revival in outsourcing demand from its mainstay financial clients, but its shares fell as markets worried a weak European economy could curb orders.

India's No. 2 outsourcer reported a surprise 2.6 percent drop in April-June profit and its sales contribution from Europe fell to about 20 percent from nearly 25 percent a year ago and 23 percent in January-March.

The company, a trendsetter in the country's showpiece IT services sector, added 1,026 staff in April-June, its slowest pace of addition in four quarters.

The lower-than-expected profit and hiring triggered concerns of a slowdown in growth, sending its shares 2.8 percent lower in a flat market <.BSESN>. The stock hit a record high on Monday.

There are still concerns lingering over Europe's debts and if the economy there is weak, consumption should be weak too, said Huey Yang, a fund manager with HSBC in Taipei.

Infosys and local rivals Tata Consultancy Services and Wipro have raised salaries by 10 to 20 percent on average to keep staff from being poached by global rivals in a strong market.

India's export-driven software services firms, however, face uncertainty on orders from Europe, the second-biggest market for the industry after the United States.

Infosys, which counts Goldman Sachs , BT Group and BP among its more than 550 customers, forecast its 2010/11 dollar revenue to rise 19 percent to 21 percent, higher than 16-18 percent projected in April.


While the global economic environment remains uncertain, we continue to see greater demand for services from our clients, said Infosys chief executive S. Gopalakrishnan.

The challenge for the industry is to enhance the investment to grow the business, given the uncertainty in the environment.

In a report this month research firm Forrester said Europe's volatile economic situation and uncertainty about corporate IT budgets would result in possible delays or cancellations of some outsourcing projects.

Growing competition from IBM , Accenture and Hewlett-Packard also pose a risk to the sector, which manages complex computer networks and maintains technology operations for Fortune 500 customers.

The numbers are really bad at operating levels, they are 40-50 bps down than what we had expected, said Shradha Agarwal, analyst at Batlivala & Karnani Securities in Mumbai.The numbers would not see a significant upgrade from these levels.

Infosys, known for its conservative outlook, has raised its full-year revenue growth forecast in dollar terms in the last three consecutive quarters.

The company expects earnings per American depositary share to rise 5.2 percent to 9.6 percent for the year, up from its previous forecast of 4.3 percent to 8.6 percent.

Nasdaq-listed Infosys said net profit in its fiscal first quarter ended June 30 fell to 14.9 billion rupees ($318 million) from 15.3 billion rupees a year ago.

A Reuters poll of brokerages had forecast a profit of 15.56 billion rupees.

Infosys reported under the International Financial Reporting Standards for the second successive quarter.

(Writing by Sumeet Chatterjee; additional reporting b Baker Li in Taipei, Reuters India company news team; Editing by Ranjit Gangadharan and Anshuman Daga)