Shares in Axeon Holdings plunged 27% following a profits warning from the Dundee-based producer of advanced battery systems, which said demand had been dampened by the downturn in the European construction sector.

Announcing that first-half losses widened following an increase in research and development spending, Axeon said the outlook was for a "reduced loss" in the second half of the year, instead of a profit.

The company has been gaining ground in markets such as automotive, where growing concern about the environmental damage caused by burning fossil fuels has stimulated interest in its lithium-ion battery systems.

However, gains on this front have been offset by problems in the construction industry, to which Axeon increased its exposure as a result of the £7.4m cash-and-shares acquisition of Switzerland's AG Ritsma last year.

The company said it had been hit by "recent flat, or possibly declining, demand from the largest customer in power tools as a result of the global construction market slowdown".

But against the backdrop of challenging global market conditions, chairman Charles Matthews insisted that the group had made significant progress in delivering its strategy.

"Growing demand for low- carbon vehicles is fuelling interest in our batteries, with increasing numbers of customers developing prototype vehicles using our batteries," he said.

In May, Axeon received a significant boost when Glasgow-based Allied Vehicles placed an order for at least 1000 lithium-ion battery packs to power a range of zero-emission vehicles.

The company has also been winning orders for batteries to use as mobile power sources in a range of products including a new generation of coffee trolleys, to be used by a European train operator.

However, while Matthews said the medium-term outlook was good, the fall in Axeon's share price yesterday indicated investors had been rattled by the bad news concerning the power tools market.

Shares in the AIM-listed stock closed down 9p at 24.5p. That compares with a closing price of 65p following the announcement of the Allied Vehicles order.

The fall could reflect concern about the implications of the downturn in construction, which has become a key end-user market as a result of the purchase of AG Ritsma.

The deal put Axeon in line for a big increase in sales volumes, but with some sales on lower margins.

In the six months to June, Axeon had turnover of £33m against £2.5m in the same period of 2007.

Pre-tax losses widened to £1.1m, from £522,000.

Broker FinnCap downgraded its full-year forecast to a loss of £1.5m, from a profit of £1.4m.