Shares in top-notch recruitment firm fall by a third after US expansion hits trouble.

The cocktail party world of headhunting appears to have left the top schmoozer Whitehead Mann with a painful hangover. The company behind the appointments of some of Britain's most powerful executives and civil servants shocked the City yesterday with the news that its expansion into the US had failed.

One competitor said: "This might signal the end of Whitehead Mann's preferred strategy to become a global player."

The shares closed down 35 per cent. They have more than halved this year. The damage was all the more acute as a number of shareholders and analysts appeared to have been told, some only a week ago, that trading conditions were unchanged.

Whitehead Mann deals only with senior appointments, unlike other UK-listed players such as Michael Page and Robert Walters, which are volume-driven businesses. Whitehead Mann's consultants do not bother with appointments to jobs paying less than £100,000 a year. Often the work involves chairmen, chief executives and finance directors of FTSE 100 companies. Its rivals are the likes of Russell Reynolds Associates, Spencer Stuart, Korn/Ferry, Heidrick & Struggles, and Egon Zehnder, as well as new players such as Zygos. These headhunters typically take a third of the first year's cash salary of the position being filled as their fee.

This is a world in which long-term relationships are built up with executives, who in turn use the executive search company that appointed them when they are in a position to hire others. Those relationships are carefully nurtured and maintained, providing a constant support for executives in difficulty. New candidates and old contacts are kept sweet through frequent contact, with lunches, cocktail bashes and the quiet chat over a gin and tonic, or two.

In the UK, Whitehead Mann remains the pre-eminent player. At the moment, for instance, it is handling the search for a new chief executive for United Business Media. It recently oversaw the appointment of the chief executive of British Land, the property giant. However, over the past year or two its judgement has come into question.

Although the US has been an ongoing strategic question mark hanging over the company, the real concern of late has been the core UK business.

The loss of key staff in the UK, including the founder Anna Mann, has worried some. Then there was the debacle this year over the appointment of the new chairman of J Sainsbury. Whitehead Mann's search process produced Sir Ian Prosser, the former chairman of Bass. The announcement of Sir Ian's appointment led to an shareholder revolt and he was never able to take up the job. Sir Ian's reputation in the City had been completely misjudged.

Hector Forsythe, an analyst for Evolution Securities, said: "Significant desertions from Whitehead Mann's US operation was not a risk that we had focused on, but does heighten our concern for the vulnerability of the core UK business."

Whitehead Mann's unexpected trading update yesterday was led by an admission that its US strategy had not worked. The company entered the US in 2000 with a small acquisition but since then it has struggled to build a team to create a significant business in the country. The problem has been the large signing-on and bonus guarantees that search teams demanded in order to defect to Whitehead Mann. In the meantime, those people that the company had brought on board became nervous about the fact that more were not arriving. At the end of September, a whole team of high-billers walked.

At a board meeting on Wednesday Whitehead Mann decided that its US strategy would not work. Stephen Lawrence, the chief executive, said that the teams on offer in the US would not have led to profitable growth and the company was faced with a "stark choice". Now it has decided to go for the less risky strategy of forming alliances with US practices.

Mr Lawrence said: "We are drawing a line in the sand with the US business." One that will make a £3m dent in profits this year (from the previously expected £10m). And there was more negative news. The company added: "The group's remaining activities in the UK, Europe and Asia are trading slightly below last year."

Mr Lawrence insisted that if any analysts and investors were given the wrong message recently, the need for yesterday's update only became apparent at this week's board meeting. The revenue shortfall outside the US is reckoned to be only 4 per cent.

However, this has puzzled some other players in the market who continue to see decent growth. One of these suggested that one problem that Whitehead Mann may be coming up against, as the market leader, is that many potential candidates who it could put up for a job are "off limits" because Whitehead Mann works for the business that employs that person. That means, for instance, that if Whitehead Mann already works for Sainsbury's, it could not recommend any Sainsbury's employee if it were asked to find someone for Tesco.

"You cannot poach where you already have a client relationship. Whitehead Mann already works for many of the larger companies in each sector so scale has become a limiting issue," the rival said.

The trend is for professional services firms to go global, led by the big accountancy practices. Leading headhunters have followed and some of Whitehead Mann's key competitors - Heidrick & Struggles and Korn/Ferry - already have a large global network. Whitehead Mann's UK business remains a potent force but its global ambitions have had to be reined in.