SAN FRANCISCO — Yahoo Inc.'s financial funk deepened at the end of 2007, prompting the slumping Internet icon to draw up plans to lay off as many as 1,000 workers.

The Sunnyvale-based company disclosed the upcoming 7 percent reduction in its 14,300-employee workforce yesterday while reviewing a 23 percent drop in fourth-quarter profit and a cautious 2008 outlook. The bad news sent Yahoo shares skidding to their lowest levels in more than four years.

In a prepared statement, Yahoo Chief Executive Jerry Yang warned of looming "headwinds," indicating that the company's tortuous turnaround efforts aren't likely to pay off this year.

"I'm surprised by how slowly they seem to be moving," said Cantor Fitzgerald analyst Derek Brown. "Yahoo still has quite a bit of work ahead."

Yahoo shares dropped $2.09, or more than 10 percent, in extended trading yesterday after finishing the regular session at $20.81, up 3 cents. The company's market value has plunged more than 50 percent since the end of 2005, wiping out $35 billion in shareholder wealth.

Yang took over as CEO seven months ago in an attempt to shake things up, but his overhaul hasn't impressed Wall Street so far. The mass firings represent Yang's most dramatic move yet.

Yahoo didn't specify which areas of its operations will be trimmed in the company's biggest purge since jettisoning 650 workers in the aftermath of the dot-com bust seven years ago. Management indicated some employees whose jobs are eliminated may be offered new assignments in other parts of the company.

Yahoo expects to absorb a first-quarter charge of $20 million to $25 million to pay for severance costs and other expenses incurred in the layoffs.

The cost cutting could reduce Yahoo's annual expenses by more than $100 million, helping offset some of the loss in revenue the company expects from a re-negotiated partnership with AT&T Inc. to provide high-speed Internet service.

Under a new deal announced yesterday, Yahoo and AT&T will share revenue generated through online advertising. Previously, AT&T had paid Yahoo a portion of the fees collected from subscribers to their cobranded Internet service. Analysts had estimated that arrangement generated about $250 million in annual revenue for Yahoo.

To ease the pain of the transition, Yahoo will receive an upfront payment of $300 million to $400 million from AT&T.

Yahoo hasn't stopped making money. But the company's 2007 profit fell 12 percent to $660 million even though advertisers spent more than ever on the Internet, where Yahoo still draws one of the Web's largest audiences.

The bulk of that additional ad revenue has been pouring into Internet search leader Google Inc., a company that was smaller than Yahoo just three years ago.

Yahoo also has been struggling to attract teenagers and young adults who are gravitating to more trendy online hangouts like www.Facebook.com and News Corp.'s www.MySpace.com.

While grappling with those challenges, Yahoo Inc. earned $205.7 million, or 15 cents per share, during 2007's final three months, down from net income of $268.7 million, or 19 cents per share, at the same time in 2006.

Reflecting the gloomy aura hanging over Yahoo, analysts had prepared investors for even worse erosion. Analysts, on average, had projected earnings of 11 cents per share for the period.

Yahoo's revenue for the period totaled $1.83 billion, an improvement of 8 percent over $1.7 billion in 2006.