General Electric Co helped to pull the plug on Wall Street's recovery rally on Friday, reporting sales that missed expectations and cautioning that recovery from the brutal recession would be gradual.

The biggest U.S. conglomerate's revenue fell 20 percent as demand for everything from jet engines to MRI machines for hospitals remained weak. The company said its orders -- an important indicator of future sales -- were down 18 percent.

GE shares fell 5 percent and together with Bank of America Corp, which posted a quarterly loss, dragged down U.S. stocks the day after the Dow Jones industrial average crossed the psychologically important 10,000 level for the first time in a year.

Big industrials including GE have slashed costs aggressively through the worst downturn the United States has experienced since the Great Depression. With the recession starting to come to an end, investor attention is turning to the question of when revenue growth will resume.

The focus has been on revenues, not earnings, said Jack De Gan, chief investment officer at Harbor Advisory Corp in Portsmouth, New Hampshire, which holds GE shares. From here on out, we need some revenue growth. And revenue was light.

The drop in revenue reflected the fact that the company has moved faster than it expected in downsizing GE Capital, which has been its weakest unit during the downturn, company officials said on a conference call with investors.

We are shrinking GE Capital faster than we had planned, Chief Executive Jeff Immelt said. That's on strategy, and as we do that the GE Capital revenues decline accordingly.

The company expects its pace of restructuring to slow next year, its chief financial officer said.

Immelt also told investors he believes the economy is improving but expects recovery to be gradual.

Shares of GE, which also makes railroad locomotives and runs the NBC Universal media business, fell 4 percent to $16.09 on the New York Stock Exchange early Friday afternoon.

Better-than-expected recent results from fellow U.S. blue chip Alcoa Inc and Dutch conglomerate Philips Electronics had raised investor hopes for GE.

PROFIT DOWN 42 PERCENT

The world's No. 1 maker of jet engines and electricity-producing turbines said third-quarter profit fell 42 percent to $2.49 billion, or 23 cents per share, from $4.31 billion, or 43 cents per share, a year earlier.

Excluding one-time items, profit came to 22 cents per share, above the 20 cents analysts had forecast, according to Thomson Reuters I/B/E/S.

Revenue fell 20 percent to $37.8 billion, below the $39.5 billion analysts had expected.

It noted that orders eased to $18.4 billion, though its total order backlog stands at $174 billion.

The better-than-expected profit reflected higher margins. Cost of sales, including operating and administrative expenses rose to 73.8 percent of sales, from 69.2 percent a year ago.

As we get into 2010, do these margin improvements remain? If they do, we'll have to start ratcheting up our earnings expectations, said Peter Klein, senior portfolio manager at Fifth Third Asset Management in Cleveland, Ohio, which owns GE shares.

GE Capital was the weakest segment, recording an 87 percent drop in profit. Every sub-segment of the finance arm, which has businesses including commercial lending and aircraft leasing, was profitable except for real estate.

Profit was up at its energy, NBC Universal and consumer and industrial segments.

Vivendi SA, which owns 20 percent of NBC Universal, may opt to sell its stake in that business this year. Immelt said GE is considering an IPO of the business, or could possibly take on another partner.

Sources have said that No. 1 U.S. cable company Comcast Corp is in talks with GE about taking a stake in NBC. Both companies have declined comment on that possibility.

GE shares are up roughly 4 percent so far this year, trailing the 15 percent rise of the Dow Jones industrial average.

The Fairfield, Connecticut-based company competes with a host of the world's largest companies, including Germany's Siemens AG, French industrial group Alstom SA and Swiss engineering group ABB Ltd.

(Reporting by Scott Malone, additional reporting by Nick Zieminski and Rodrigo Campos in New York, David Brett and Joanne Frearson in London and Blaise Robinson in Paris; Editing by Derek Caney and Richard Chang)

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