Microsoft is cutting 5,000 jobs as it grapples with a sharp downturn in technology spending among companies hit by the global economic slump.

Less than seven months after Microsoft's billionaire founder Bill Gates stepped aside from day-to-day management, the Seattle-based software multinational disappointed Wall Street with an 11% slump in quarterly profits to $4.17bn (£3bn).

Layoffs will be in a wide range of areas including research and development, sales, marketing, finance, human resources and IT over the next 18 months, with 1,400 immediate redundancies.

The cuts, intended to save $1.5bn annually, are the first large-scale reductions in staff at Microsoft since the company was founded in 1975.

Microsoft's chief executive, Steve Ballmer, said: "While we are not immune to the effects of the economy, I am confident in the strength of our product portfolio and soundness of our approach."

The software company is facing a crucial year as it prepares to launch a new operating system, Windows 7.

Microsoft's client revenue dropped 8% because of weakness in the personal computer market and a shift in demand towards cheaper laptops. But its sales of entertainment devices still edged up by 3%, aided by 6m sales of Xbox 360 game consoles in the run-up to Christmas.

The company's shares slumped 8% to $17.77 within minutes of the start of trading on New York's Nasdaq exchange, hitting their lowest level since 1998.

Chief financial officer Chris Liddell said: "Economic activity and IT spend slowed beyond our expectations in the quarter, and we acted quickly to reduce our cost structure and to mitigate its impact."

Liddell said Microsoft was planning for economic uncertainty to continue "through the remainder of the fiscal year".

Microsoft has had a difficult year, having unsuccessfully tried to buy the web-search specialist Yahoo to bolster its internet presence, which is widely considered to be weak in comparison with rivals such as Google.

Heather Bellini, a technology analyst at UBS in New York, told Bloomberg News that Microsoft would get a poor hearing from investors unless it acted quickly to trim its cost base in response to one of the worst recessions since the second world war.

"I don't care if they get rid of contractors, full-time employees, facilities, health benefits – just get the costs out," she said.