Bayer, the troubled German chemicals and pharmaceuticals group, has withdrawn Baycol, its anti-cholesterol drug, from the Japanese market, two weeks after fatal side effects forced it to pull the product from all other markets.

Bayer said the Japanese withdrawal would cut its operating income by E150m ($135m) this year, on top of earlier estimates of E600m-650m. Japan is the world's second largest pharmaceuticals market after the US.

The Japanese withdrawal is the latest twist in a tale that has brought the pharmaceuticals division - which accounts for about a quarter of the group's revenues - to its knees. Baycol was expected to have sales of over $1bn this year.

The loss of revenue from its most important new drug in years has forced Bayer to abandon its long-held opposition to merging its pharmaceuticals business - with a larger partner - and postpone its New York Stock Exchange listing.

Bayer has been widely criticised for the way it handled the withdrawal, informing investors about the withdrawal before telling doctors, pharmacists and government health departments.

One executive from a German rival said Bayer, which created the modern pharmaceuticals industry with its discovery of Asprin just over 100 years ago, had virtually destroyed its reputation overnight.

"They had a warm fuzzy image with consumers because of Aspirin and they lost it in a week," they said.

Baycol, which is known as Lipobay outside the US, has been linked to more than 1,000 cases of serious side effects, including 52 deaths. Bayer blames a cross-reaction with another fat-reducing drug gemfibrozil.

Gemfibrozil, a generic medicine produced by a number of companies, is not sold in Japan, but Bayer said on Thursday that regulators had warned there were plans to launch it there soon.

Bayer faces legal action from the families of a number of people who died after taking Baycol, raising the possibility of costly class action litigation.

Bayer has said it believes the lawsuits are unfounded, and that it would strongly contest them. But analysts have put the cost of litigation at anywhere between $500m and $3bn, depending how many more deaths are linked to the drug as doctors around the world re-examine suspicious deaths among their heart patients.

The US Food and Drug Administration has assured people using other brands of lipid-lowering medicine that there is no risk, but the withdrawal of Baycol has triggered a Europe-wide safety review of the $15bn-a-year class of drugs, which are known as statins. Analysts say Pravachol, a more expensive statin made by Bristol-Myers Squibb of the US has picked up about half of Baycol's market, helped by a newspaper advertising campaign promising free samples.