CMC and its rivals, such as IG, have been in focus as regulators tighten rules on products which allowed anyone with a bank card to make highly-leveraged bets on financial markets via apps and online platforms.

CMC, headed by Peter Cruddas, one of the City of London's most prominent supporters of Britain's exit from the European Union, said on Tuesday that its second quarter had also been hurt by sustained low market volatility.

Markets have failed to really stir this year, even when faced with the prospect of a global trade war spearheaded by Washington and Beijing, and the realisation that Britain could crash out of the EU without an exit deal.

The problems for online betting firms were exacerbated after the EU's securities watchdog in July implemented a ban on the sale of 'binary' options to retail customers due to concerns about significant losses made on the inherently high-risk speculative products.

Thousands of retail investors had little protection in place and lost large sums when the Swiss franc surged four years ago, generating a swathe of legal claims.

CMC, which started with a 10,000-pound investment in 1989, said the measures by the European Securities and Markets Authority (ESMA) had reduced UK and European retail client activity.

Shares in the company fell as much as 20 percent in early trading before recovering some of those losses to stand 12 percent lower at 145 pence by 0850 GMT.

Contracts-for-difference (CFDs) and spread betting revenue for the full year ending in March 2019 are likely to be about 20 percent lower, compared with previous guidance for a drop of 10-15 percent, CMC said.

Morgan Stanley analysts said the products accounted for 88 percent of the group's revenue, adding that the warning meant reported revenue would fall 5-8 percent short of consensus estimates, while pretax profit would be 20-25 percent lower.

Binary options and CFDs are financial products that give investors exposure to price movements in securities without them having to own the underlying assets.

Analysts at Peel Hunt, however, said the regulatory shift could ultimately benefit CMC.

"We believe the imposition of tighter regulation is likely to prompt a consolidation of the market towards large players with well invested platforms such as CMC," they said in a note.

CMC said it would continue to spend money on strategic initiatives, but discretionary spending would fall to offset the hit to profitability.

IG last week reported a fall in quarterly revenue, citing the same causes.

The sector had enjoyed revenue growth last year helped by the boom in digital currencies such as bitcoin, but the cryptocurrency charm was also short-lived.

(Reporting By Sinead Cruise in London and Noor Zainab Hussain in Bengaluru, editing by Clara Denina and Kirsten Donovan)

By Noor Zainab Hussain and Sinead Cruise