Capital investment by companies excluding the financial and insurance sectors fell 1.2 percent in the July-September period from a year ago, the Finance Ministry said Monday, adding to concerns over the impact of the U.S. housing loan mess.

The drop in capital investment marked the second consecutive quarterly decline on year, but the dip in the latest quarter is smaller. Capital spending on plants and equipment fell 4.9 percent in the April-June quarter.

The latest quarterly survey covered about 20,000 companies capitalized at ¥10 million or more.

The survey clearly showed that profits and the rate of sales growth slowed, clouding the outlook for capital investment and wage growth, economists said, noting a possible U.S. slowdown will damage export-led growth here.

Overall pretax profit fell 0.7 percent in the quarter, marking the first slide in five years. Sales rose 2.0 percent, the smallest gain in four years.

"I don't think Japan will enter a recession, but it largely depends on external demand, because a favorable (level) of internal demand is not seen yet," said Hiroshi Shiraishi, an economist at Lehman Brothers in Tokyo.

Companies earned profits, but this did not translate into wage growth, Shiraishi said.

The latest survey showed that small and medium-size companies are finding it difficult to pass on rising raw material costs and such rising costs have started to squeeze their profits, he said, pointing to a drastic 16.9 percent decline on year in pretax profits at medium-size companies, which in the survey are defined as those capitalized at ¥100 million to ¥1 billion.

Manufacturers' spending on plants and equipment rose 6.1 percent, while nonmanufacturers' capital spending fell 5.1 percent.

The government will use the report to revise its gross domestic product estimate due out Friday. Economists said the government will "slightly" revise capital spending figures upward, but overall GDP figures will remain around the same level.

Preliminary GDP figures released last month showed the economy expanding an annualized 2.6 percent in the quarter, thanks to solid exports to Asia and Europe.

In a separate report, the labor ministry said wages remained unchanged in October from a year earlier.