Shares in Amazon, the world’s largest online retailer, plunged 20 per cent by midday on Wednesday after it reported a drop in second-quarter profits, again citing higher technology investment and other factors.

The company made its announcement after the market close on Tuesday. Shortly after noon on Wednesday, Amazon’s shares were down $6.70 at $26.89 in New York.

Amazon has been spending heavily on development, including preparations for its entry into digital video downloads, expected later this summer. The company continues to refuse to comment on the likely timing or details of its digital plans, although earlier this week, a designated “Amazon Digital Video” holding page appeared briefly on its US website.

The page included tabs marked “View your download queue” and “How to get video to your TV”.

In a further sign that a launch is imminent, Jeff Bezos, chief executive, said the company was expecting to see a slowdown in its technology spending in the second half of the year. “We’re looking forward to the coming decrease in our year-over-year growth rates in technology spending in the second half of 2006,” he said.

The retailer said its operating income fell 55 per cent to $47m during the quarter, “mainly due to technology and content investments”. It also cited higher shipping costs, due to its free shipping offers, and a $20m charge due to the termination of its contract with Toys R Us, the toy retailer.

Amazon’s technology and content spending increased by 36 per cent over the same quarter last year, reflecting increased hiring of staff last year.

Mr Bezos said Amazon remained committed to a strategy of developing what he called “three big flywheels” for sustaining growth – selection, price and availability. “So the energy that we put into building those flywheels today will continue to pay dividends years from now,” he said.

The company also said its shipping losses had increased 33 per cent to $60m, due to demand for its free shipping offers, including its “all-you-can-ship” Amazon Prime subscription scheme in the US. Amazon said the number of subscribers to Amazon Prime, launched in February 2005, had more than doubled since the start of the year, without giving numbers.

Amazon has continued to expand its range of offerings, despite growing concerns among investors over the likely timing of a return on investment. During the past quarter it moved into online groceries - as first reported by the FT - with a line of 14,000 non perishable food and grocery items, part of its strategy of offering a total online retail service. It also launched a sports store on its German website.

It is also planning to “invest heavily” in developing its own US toy sales after the termination of its relationship with Toys R Us earlier this year.

The retailer posted reported quarterly net income of $22m, or 5 cents per share, against $52m in the same quarter last year. Sales rose 22 per cent to $2.14bn.

Amazon also lowered its forecast for operating income for the full year, to between $310m and $440m - representing a 28 per cent decline and 2 per cent growth on 2005 - down from a previous range of $390m and $520m.