Yahoo Inc reported a drop in quarterly profit on Tuesday and its shares fell nearly 7 percent as Chief Executive Jerry Yang predicted a tough 2008 amid a weakening U.S. economy.

Yahoo reported a fourth-quarter profit of $205.7 million, or 15 cents per share, down from $268.7 million, or 19 cents per share, a year ago.

Revenue rose 8 percent to $1.83 billion a year ago. Excluding payments to advertising partners, revenue rose 14 percent to $1.4 billion.

Analysts, on average, had forecast earnings per share of 11 cents on revenue of $1.41 billion excluding traffic acquisition costs, according to Reuters Estimates.

While we will continue to face headwinds this year, we believe that the moves we are making will help us exit 2008 stronger and more competitive and return to higher levels of operating cash flow growth in 2009, Yang said in a statement.

Yahoo's larger share of the display market makes it more vulnerable to any spending pullbacks in a recession. Analysts expect key rival Google Inc may fare better in a downturn with its dominance of paid search listings, a form of advertising that is viewed as more closely tied to sales.

Yahoo shares fell to $19.40 in extended trading after closing at $20.81 in regular trade.

(Reporting by Michele Gershberg; Editing by Braden Reddall)

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