Barclays' key investment bank arm ended 2011 with its worst quarter for three years as the euro zone debt crisis hit bond trading, dragging the British bank's annual profit down on the year before.

Barclays said on Friday it had cut bonuses at investment banking division Barclays Capital by 35 percent from the year before, and incentive awards across the group were down 26 percent.

Barclays, the first of the big UK banks to report, has come under pressure to rein in pay for bankers and its boss, Bob Diamond, in the face of a tough economic climate.

Barclays, Britain's fourth-biggest bank by market value, reported a pretax profit of 5.9 billion pounds for 2011, down 3 percent on the year and below analysts' forecast of 6.1 billion, according to a company poll.

Income at BarCap fell to 1.8 billion pounds in the fourth quarter, down 19 percent on the previous three months.

A slump in bond trading and advisory work hammered all banks late last year, and BarCap fared worse than some U.S. rivals but not as bad as Credit Suisse.

Its return on equity slumped to 5.8 percent for the year, from 7.2 percent in 2010 and less than half its target of 13 percent.

We are not satisfied with the return on equity we delivered in 2011 and are committed to delivering steady improvement moving forwards, Diamond said in a statement.

We expect the economic and regulatory environment to continue to be challenging in 2012, he added.

Barclays said losses on bad loans fell by a third from 2010 to 3.8 billion pounds.

(Reporting by Steve Slater, Editing by Mark Potter and Jane Merriman)