Pendragon is predicting a £20m hit on its profitability this year, and a further £10m hit in 2008. It blames a downturn in consumer spending and over-supply in the new car market.

Its shares dropped by 17% in early trading today, to barely above its 52-week low. The news also knocked investors’ confidence in rival dealer group Lookers, whose shares dropped 7%, although analysts believe it does not face the same pressure as Pendragon.

Pendragon said it has been forced to reduce prices to stop sales from declining. Consumers have been shaken by interest rate rises, and carmakers continue to flood the new car market, leading to price cuts which impact on used car sales.

As a result, Pendragon’s 2007 operating profit forecast is £20m lower than the £75m previously expected, and 2008’s is likely to be £10m down.