LONDON (Reuters) - British bank Barclays Plc said profits fell in the first quarter and refused to rule out a rights issue as it took a £1 billion ($2 billion) hit for the impact of the credit crunch.

That was less than the hit taken by many other banks, but its capital cushion remains one of the thinnest among European banks, especially after UK rivals Royal Bank of Scotland and HBOS unveiled big rights issues.

Barclays, Britain's third-biggest bank, said yesterday the write-down for its investment bank arm Barclays Capital (BarCap) was net of a £700 million gain on the fair valuation of debt it carries on its own books. The bank said £500 million of that gain was reversed in April.

Faced with the write-downs and slower income growth while financial markets remain fragile, finance director Chris Lucas told analysts he was comfortable with an average forecast for 2008 profits of £6.4 billion, which would be down 10 percent from 2007.

Barclays shares were down 3.4 percent at 412 pence, leading a weak UK bank sector lower. Analysts blamed the drop on concern it hasn't boosted its capital position, potentially constraining future growth.

The bank, which did not disclose the extent of its first quarter profit fall, expects its core tier one capital ratio to be slightly lower at the end of June than the 5.1 percent it reported at the end of 2007. It intends to lift this to 5.25 percent "in time".

Lucas said Barclays was keeping its options open in regard to improving capital.

When asked if that meant it could launch a rights issue, he said: "We are clear that all options remain available ... we are not going to rule in or rule out anything."

Options to lift capital include retaining earnings and slower lending. Lucas said risk-weighted asset growth would be lower this year than in 2007. Analysts say Barclays is also likely to be seeking to sell stakes to outside investors.

Alex Potter, analyst at Collins Stewart, said the low capital position was sustainable but could drag on the shares.

"Do you bite the bullet now, recapitalise and, though you may have day one dilution, give yourself a better footing to generate growth? Or do you leave it as an overhang over the business?" Potter said.

"Hats off to them for being in a position where they are not forced into this, but nonetheless the bar has been raised."