(Reuters) - British engineer Smiths Group Plc's (>> Smiths Group plc) first-half profit fell 3 percent as its second-biggest unit was hit by intense competition and a strong pound reduced earnings from the United States, where the company generates almost half of its revenue.

Smiths Group, which generates about 95 percent of its revenue from outside the UK, said full-year earnings would be reduced by 4 to 5 percent if foreign exchange rates remained at current levels.

The company's stock fell as much as 7 percent in early trading on Wednesday, making it the biggest loser on the FTSE-100 index <.FTSE>.

The pound hit a five-year high against a basket of currencies including the dollar in mid-February on expectations that the Bank of England would be the first major central bank to raise interest rates.

The pound appreciated 8 percent against the dollar in the six months ended January 31. Smiths gets about 45 percent of its revenue from the United States.

Reported headline revenue at Smiths Medical, its second largest unit, fell 6 percent in the first half, and the company said tough trading conditions were expected to continue.

The headline operating margin in the business fell to 18.3 percent from 21.1 percent a year earlier. The company has also blamed a 2.3 percent tax on medical devices in the United States for putting pressure on the business.

Smiths Medical, which the group tried to sell last year, competes with companies such as Covidien Plc (>> Covidien plc), Teleflex Inc (>> Teleflex Incorporated), Hospira (>> Hospira, Inc.) and CareFusion Corp (>> CareFusion Corporation).

The company said headline revenue in its largest unit, John Crane, was flat due to the strong pound. On a constant currency basis, revenue grew 2 percent.

John Crane makes mechanical seals, bearings and couplings for customers including Chevron Corp (>> Chevron Corporation), BP Plc (>> BP plc), Shell , GE Energy and Power (>> General Electric Company), Rolls-Royce Holdings Plc (>> Rolls-Royce Holding PLC), Siemens (>> Siemens AG) and BASF (>> BASF SE).

Headline operating profit dropped to 245 million pounds ($406 million) for the first half ended January 31, from 253 million pounds a year earlier.

Smiths said headline revenue fell slightly to 1.44 billion pounds from 1.47 billion a year earlier.

The company raised its interim dividend to 12.75 pence from 12.50 pence.

Smiths' shares were down 6 percent at 1270 pence at 0937 GMT. The company's shares had risen about 3.8 percent in the year to Tuesday's close.

(Reporting by Aashika Jain in Bangalore; Editing by Gopakumar Warrier and Ted Kerr)

By Aashika Jain