Insurance giant Prudential saw almost £1.5 billion wiped from its market value yesterday on fears it would slash its dividend payout to shareholders.

The slump came as Prudential gave further woe to policyholders by cutting bonus payments to customers of its with-profits saving and investment products.

The news sent a shock wave through the sector and pulled the whole stock market lower.

By lunchtime, shares in the group were 19 per cent lower, down 73.25p to 319.75p, valuing it at just £6.4 billion.

Chief executive Jonathan Bloomer said: "2002 was a tough year, with market confidence being adversely affected by increased political risk and a deteriorating economic outlook. Eight weeks into this year, it is clear that stock markets around the world continue to be volatile and consumer confidence has deteriorated."

He made the comments as Prudential said operating profits rose two per cent to £1.13 billion during 2002.

The group, which generates more than 70 per cent of sales outside the UK, said total group insurance and investment sales during the year were £27.6 billion, up 29 per cent on 2001.

New business profits grew 15 per cent during the year to £774 million, while margins for new business also improved.

However, when including the impact of falling investments returns, pre-tax losses came in at £483 million, against losses of £455 million.

The group's figures were in line with market expectations but shares tumbled as Prudential failed to reassure on whether it would pay a dividend this year.

For 2002, it is paying a total dividend of 26p, up from 24.5p the previous year.

Mr Bloomer said it was "inappropriate" to set out the dividend policy for 2003 amid the uncertain market conditions.

Analysts said the remark triggered concerns Prudential would slash the pay-out.

One said: "The results were not bad under the circumstances and this year's dividend was in line with what the market was looking for - but it is the hint about a dividend cut that has worried the market."

In addition to shareholder woes, policyholders were also suffering as Prudential cut its bonus rates to its 2.1 million with-profits investors.

The group said bond-holders would receive a regular bonus of 3.25 per cent this year, compared with four per cent in 2002.

Personal pension customers would receive 3.5 per cent, compared with 4.5 per cent.