Italian restaurant chain Prezzo has issued a profit warning after solid Christmas trading failed to compensate for new outlet opening costs and a poor November.

The operator of 127 restaurants said profit for 2007 would be at the lower end of City forecasts.

It enjoyed a busy Christmas but the sales weren't enough to offset two negative factors.

Prezzo reported a downturn in trade during November. It also incurred pre-opening costs after adding 14 new restaurant sites in the last two months of the year.

Analysts had expected Prezzo to generate £11.1 million profit, against £9.1 million made in 2006.

Shares in the company fell by 10.5% to 40.25p in early trading.

Stockbroker Altium downgraded Prezzo to a 'Hold' from a 'Buy' following the trading update.

'Whilst the shares do suffer from poor liquidity we believe that the shares could further weaken from current levels after having underperformed by around 27% over the past three months,' said Altium analyst Wayne Brown.

'That said this could create an opportunity for private equity to acquire the business.'