TOKYO (AP) -- Toyota said the strong yen and weaker U.S. sales took a bite out of January-March earnings but projected worse was to come: A 27 percent plunge in full-year profit -- the first drop in seven years.

The results and outlook released Thursday highlight how a tough North American auto market is hammering the Japanese automaker.

Unfavorable currency swings are adding to a growing list of problems for Toyota Motor Corp., including soaring material and energy costs and a stagnant auto market in Japan, its home market.

''There is no mistake that things are seriously tough -- even for Toyota,'' said Tsuyoshi Mochimaru, auto analyst at Lehman Brothers in Tokyo.

Mochimaru warned the sales strides Toyota is making in China and other relatively new regions probably won't be enough to make up for weaker revenue from the key North American market, which accounts for about a third of its sales.

A weaker dollar, now hovering at about 100 yen compared with nearly 120 yen last year, is eroding the income of Japanese exporters like Toyota.

But Mochimaru noted Toyota tends to be conservative and is mapping out the worst-possible scenario. And it could emerge with better results, as long as exchange rates stay stable, he said.

For the fiscal fourth quarter, the maker of the Prius hybrid and Camry sedan reported a 28 percent drop in net profit to 316.8 billion yen (US$3.05 billion; euro1.98 billion) -- the first on-year decline in quarterly profit since April-June 2005.

Quarterly sales rose 3.8 percent in the most recent quarter to 6.567 trillion yen (US$63.14 billion; euro40.92 billion).

Toyota had been on a roll with the success of its fuel-efficient models, including the Prius and the Corolla subcompact, which have gotten a boost from rising gas prices.

For the fiscal year just ended in March, Toyota racked up record profit of 1.72 trillion yen (US$16.54 billion; euro10.72 billion) -- up 4.5 percent from the previous year. That was in line with the projection Toyota gave in February.

Annual sales grew 9.8 percent to 26.289 trillion yen (US$252.8 billion; euro163.8 billion), also a record for the company.

But recent credit woes in North America have dampened sales in recent quarters.

''We are facing a severe business environment,'' President Katsuaki Watanabe said. ''Toyota considers this headwind as a valuable opportunity to turn it into a more flexible and stronger company.''

Toyota projects this fiscal year's profit will tumble to 1.250 trillion yen (US$12.0 billion; euro7.8 billion), while annual sales are seen falling 4.9 percent to 25 trillion yen (US$240.4 billion; euro155.8 billion).

The last time the company's fiscal profit declined was in the year ending March 2002, when net profit slumped 17.5 percent. And the last time annual sales fell was in the year ending March 2000, when sales dipped 0.3 percent, mainly because of a weak dollar.

Toyota -- the world's second-biggest automaker after General Motors Corp. -- also warned it will need to spend more in technology research and carry out cost cuts to stay competitive.

The recent shift to smaller cars is a crunch for the makers because those vehicles are cheaper and have smaller profit margins than trucks and other gas guzzlers.

Toyota has been steadily boosting sales in recent years at a pace some analysts say is on track to overtake General Motors as the world's No. 1 automaker in annual vehicle sales.

For the fiscal year ended March 31, Toyota sold 8.91 million vehicles around the world. That was slightly below the 8.93 million vehicles it had expected to sell for the fiscal year, but still 4.5 percent better than a year earlier.

North American vehicle sales, which had been strong for Toyota in the past, fell for the last fiscal quarters, according to the company. Japanese sales have also been stagnant recently.

Toyota said it expected to sell 9.06 million vehicles globally for the fiscal year through March 2009, up 1.6 from the year just ended.

Despite their troubles, Japanese automakers appear to be faring better than their American rivals. GM lost US$3.3 billion in the first quarter. Ford had a surprise profit of US$100 million for the same period but expects to lose money this year as the U.S. auto market deteriorates.

Honda Motor Co., Japan's No. 2 automaker, said last month that its January-March profit declined 86 percent compared with the same period a year ago because of a corporate tax levied on its Chinese joint venture. Nissan Motor Co. reports earnings next week.

Toyota shares slid 1.8 percent to 5,480 yen (US$52.7; euro34.2) in Tokyo. The results were released just as the market closed.