Chief executive Jean-Martin Folz said raw material costs had significantly hampered the sustained effect of production cost cuts.
“We consider that the full-year impact of raw materials price increases will be around €450 million (£307m), which is far more than our initial assumption,” he said.
Folz, who was “not satisfied” with earnings in the first half and the outlook for the second half, said he will present details of an “action plan” to improve earnings in September. He added that Peugeot intends to improve operating profit in 2007 compared with 2006.
Profit was also hurt by a charge from the plan to close the Ryton plant in Coventry in the first half of 2007. Folz said he had no plans to close other European factories.
Total unit sales by the Peugeot and Citroen brands rose by 10,300 vehicles to 1,764,500 units in the first half. The C1 and 107, the least expensive models Peugeot sells, increased their sales by 88,200 cars, according to the company's interim report.
That shift to the company's smallest cars from larger models such as the 407 sedan reduced operating profit by €163m (£111.4m). Profit was also cut by a production drop of 111,300 cars.
Peugeot said it would continue to reduce costs at an annual rate of about €600m (£410m) a year.