Toy firm Hornby warned it was facing a tough Christmas after disappointing sales of Olympics merchandise left it nursing a half-year loss.

It made £3.5 million on sales of London 2012 goods such as model taxis and buses, but margins were weaker than expected and after provisions to cover unsold stock it slid to a £541,000 loss in the six months to September.

The Margate-based firm admitted it was battling against significant short-term challenges as the Olympics blow added to supply-chain woes and poor consumer demand. UK sales lifted by 3% in the half-year but plunged by 15% with Olympics sales stripped out.

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Hornby, which makes model railways, Scalextric racing cars and also owns the Airfix and Corgi brands, said conditions were likely to be weak in the current half-year as retailers remain cautious on order intake. It axed its interim dividend and said payments would only resume once performance improved. Shares fell 2%, having plunged by around 60% over the past year.

Outgoing chairman Neil Johnson said: "While we face some significant short-term challenges, we are working hard to address these."

The group is now focusing efforts on addressing supply-chain problems after one of its main manufacturers announced it was rationalising its facilities.