NEW YORK (Reuters) - Microsoft Corp stunned Wall Street with disappointing results that included plans to slash up to 5,000 jobs and a warning that profit and revenue will almost certainly drop over the next two quarters.

The news from the world's largest software maker, which had not been expected to report results until after the close of trading on Thursday, sent shock waves across financial markets, pulling down the Nasdaq and the US dollar, and sending US Treasury debt prices higher as investors sought safer assets.

Microsoft's shares dropped as much as 11 percent to its lowest level since January 1998, adding to a 40 percent decline in the past year. It blamed the miss on the weakness of the PC market and the popularity of low-cost netbook computers, which have combined to badly undercut sales of its dominant Windows operating system.

The market has become so volatile, Microsoft cautioned, that it will not issue earnings or revenue forecasts for the rest of its fiscal year ending June 30, 2009 — other than to predict both will very likely be lower.

"It is pretty bad when things are deteriorating so fast that even the largest companies in the world don't know how rapidly it is happening," said Jefferies analyst Katherine Egbert.

Microsoft posted a profit of $4.17 billion, or 47 cents per share, in its fiscal second quarter ended December 31, versus a profit of $4.71 billion, or 50 cents, a year earlier. Analysts were looking for earnings per share of 49 cents, according to Reuters Estimates.

Revenue rose two percent to $16.63 billion, missing the average analyst forecast of $17.1 billion. Microsoft's elimination of 5,000 jobs — 1,400 of which yesterday — amounts to about five percent of its estimated 96,000 work force, the biggest reduction ever by the software maker.

"Clearly business conditions are worse than people were expecting," said Richard Williams, analyst at Cross Research. "This is a substantial amount of jobs cuts. Microsoft has never had a lay-off like this in my knowledge and it's sending a signal that the times are definitely changing."

The job cuts follow similar moves by other technology firms, including AT&T Inc, Dell Inc, Motorola Inc and Advance Micro Devices Inc, all of which are suffering from the global economic slowdown.

Microsoft faces a shift by PC buyers to cheaper netbooks, which are small, stripped-down laptops. Netbooks can run Windows, but Microsoft makes more on each sale of Windows for a PC than it does for a netbook. Some netbooks also use the rival open-source Linux software. Chief executive Steve Ballmer said Microsoft also lost market share to Apple Inc, which on Wednesday posted strong results.

"We are certainly in the midst of a once-in-a-lifetime set of economic conditions," Ballmer said on a conference call. "The economy is resetting to a lower level" of spending, he said, adding that he did not expect a quick economic rebound.

However, Ballmer noted that Microsoft will be adding "thousands of jobs" in strategic areas like Internet search, where it has been lagging behind Google Inc, and that he still desires a search partnership with Yahoo Inc.