Amazon.com Inc.'s (AMZN) shares tumbled more than 12 percent Wednesday after the Internet retailer startled Wall Street with a soft sales outlook for the holiday shopping season.

In a report after the markets closed Tuesday, the Seattle-based company said its net income fell to $30 million, or 7 cents a share, for the three months ended Sept. 30, from $54 million, or 13 cents a share, a year earlier.

The income slump came despite a rise in revenue. The company said net sales increased to $1.86 billion in the third quarter, up 27 percent from $1.46 billion last year.

But Amazon also said it is projecting sales of $2.86 billion to $3.16 billion for the quarter ending Dec. 31. The mean estimate, $3.01 billion, falls below the average Wall Street estimate of $3.08 billion in revenue at a time when Americans traditionally flood stores for Christmas gift buying. Of 13 analysts polled by Thomson Financial, the lowest estimate was for fourth-quarter sales of $2.91 billion.

Its shares fell $5.59, or 12.1 percent, to $40.58 on the Nasdaq Stock Market (search).

Excluding an unanticipated one-time $40 million legal charge in the third quarter, Amazon said its net income would have been $50 million, or 12 cents per share. Analysts polled by Thomson had expected 10 cents per share on revenue of $1.84 billion.

In August, Amazon announced it would pay $40 million to Soverain Software LLC to settle a patent-infringement lawsuit. Chicago-based Soverain had alleged that Amazon's Web site infringed several Soverain patents on network sales systems and Internet server access control and monitoring systems.

Sales in the United States and Canada jumped to $1.04 billion, up 28 percent from $816 million in the same period last year. International sales rose to $817 million, up 26 percent from third quarter 2004 sales of $647 million.

Electronics and general merchandise sales were brisk, growing 43 percent worldwide to $491 million, up from $344 million last year.

Books, music and other products in the media category still make up the bulk of the company's revenue. Media sales rose 20 percent to $1.31 billion, up from $1.09 billion last year.

Amazon said it sold more than 1.6 million copies of the latest Harry Potter edition, making it the company's biggest new product release.

For the full year, Amazon is predicting sales of $8.37 billion to $8.67 billion.

The company did not offer any guidance for fiscal 2006, but said it plans to spend more money hiring software engineers and on other technology development costs.

"This is something that keeps increasing," Piper Jaffray analyst Safa Rashtchy said, noting that the company's technology and content expenses are approaching 6 percent of total revenue — nearly three times what it spent a few years ago.

In a conference call with analysts, Jeff Bezos (search), Amazon's founder and CEO, and Tom Szkutak, chief financial officer, said the company believes its growing investment in technology will ultimately improve shareholder returns — even though it will likely take time for it to pay off.

Bezos and Szkutak said they remain pleased with Amazon Prime (search), a $79-a-year service that gives people unlimited two-day shipping. "Customers like it. The prime members that are subscribers are buying more, they're doing more cross-shopping," Szkutak said, especially in electronics, tools, kitchen supplies and health and personal care products.

The company did not disclose how many customers have signed up for it or how much money Amazon Prime has brought in since it debuted in February.

Amazon.com started out as a virtual book store 10 years ago, and is now the world's largest online retailer, selling everything from brake repair tools to belly rings.