British water company Severn Trent reported a slightly bigger-than-expected drop in underlying pretax profit, reflecting increased investment in water networks and challenging conditions at its water treatment division.

The company, which provides water and sewerage services to over 3.7 million households and businesses in the Midlands and mid Wales, said on Friday underlying pretax profit fell 1.9 percent to 155 million pounds, with revenue 2.1 percent higher at 886 million pounds.

Analysts were expecting a pretax profit of 157 million pounds, according to a Thomson Reuters I/B/E/S poll.

The difficult economic backdrop had impacted its water services unit that provides water and waste treatment in Europe and North America, with Italy being particularly hard hit, the company said.

It has not been investing further in Italy, it added.

While the fundamental long term drivers in our markets remain strong, the first six months were a continuation of the challenging economic and operating environments we saw in the second half of last year, it said in reference to the services unit.

The firm raised its interim dividend to 28.04 from 26.04 pence a year ago and remained committed to its dividend policy of 3 percent above retail price inflation, Severn Trent chief executive Tony Wray said in a statement.

Earlier this week, larger peer United Utilities reported a lower profit hurt by higher capital spending, while Pennon
shares slipped on fears of a slowdown at its key waste management unit Viridor.

Shares in Severn Trent fell 3.4 percent to 1,471 pence on Thursday, valuing the business at just under 3.5 billion pounds.

(Reporting by Alessandra Prentice, Editing by Rosalba O'Brien)