Desire Petroleum, one of three British companies exploring the waters off the disputed archipelago, said Monday that its initial drilling revealed that, "oil may be present in thin intervals but that reservoir quality is poor."

Shares in the company almost halved in Monday trading at London's Stock Exchange, with the remaining two companies, Rockhopper and Falkland Oil and Gas, also losing substantially.

Launched last month, the drilling activities -- the first in a decade there -- sparked an angry reaction by Argentina, which has repeated its claim to the islands. The diplomatic row is reviving memories of the military conflict between both nations over the islands in 1982.

The Argentinian government is seeking support from its partners in the region and has protested the drilling but London underlined that it was Britain's legitimate right to explore the waters.

Massive drilling gear was shipped from the Scottish North Sea port Aberdeen to the Falklands but hopes for an oil boom near the Falklands have been dealt a blow.

Desire's so-called Liz well some 1,000 miles south of the islands reached a depth of 2.22 miles, with first traces of hydrocarbons detected at a depth of 1.4 miles, the company said in a statement.

"Deeper gas shows have also been encountered while drilling, particularly below (11,220 feet) and these have still to be evaluated by wireline logging and sampling," the company said. "Until the logging is complete and the results analyzed it will not be possible to determine the significance of the hydrocarbons encountered and whether the well will need to be drilled deeper, suspended for testing or plugged and abandoned."

Previously the company said findings indicated the area has "a proven working hydrocarbon system with an excellent oil source rock. In addition, recent studies have indicated there is also a significant gas potential in the basin."

Scientific reports, cited earlier by Desire and other companies, said the region could be holding recoverable oil in excess of 3.5 billion barrels and natural gas of more than 9 trillion cubic feet, making it potentially the largest oil field outside Saudi Arabia.

Desire will make a full announcement on its latest findings later this week, it added.

Alan Sinclair, analyst at Seymour Pierce, said the market reaction sparked by the Desire announcement was too harsh.

"Whilst the market may have been looking for seagull-scorching test results from Liz, it should be borne in mind that this is the first of a potential six-well program by Desire," Sinclair wrote in a research note. "It is encouraging that initial indications suggest that potentially all the ingredients -- reservoir, trap and hydrocarbons -- are present in the general area."

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