By Jonathan Stempel and Lilla Zuill

OMAHA, Nebraska (Reuters) - Warren Buffett told a record crowd at a somber annual meeting of his Berkshire Hathaway Inc that first-quarter operating profit fell and the company's book value declined 6 percent, as the recession hurt many of the company's businesses and investments.

Operating profit fell about 12 percent from a year earlier to $1.7 billion, as most of Berkshire's businesses were "basically down," Buffett told an estimated 35,000 people at the meeting in downtown Omaha.

The decline in book value results in part from falling stock prices and higher losses on derivatives contracts, and comes on top of a 9.6 percent decline last year, the biggest drop since Buffett began running the company in 1965.

Buffett acknowledged that Berkshire will probably lose money on derivatives tied to the credit quality of junk bonds, though he still expects to make money on a much larger and longer-term derivatives bet that stock prices will rise.

Berkshire's cash stake fell to about $22.7 billion on March 31 from $25.5 billion at year end, Buffett said. Berkshire expects to report results on May 8.

The outlook punctuated a meeting that had a decidedly more serious and somber tone from years past as many investors expressed worries about the economy, Berkshire's investments, and how long the 78-year-old Buffett plans to stay on the job.

Half the questions were pre-screened by journalists, providing a tougher and more substantive dialogue with Buffett and his 85-year-old vice chairman, Charlie Munger.

Berkshire's stock has fallen 39 percent since December 2007, but Buffett said no stock buybacks are planned because Berkshire's share price is not "demonstrably below" the company's intrinsic value. Profit fell 62 percent last year.

Buffett offered a gloomy forecast for parts of the economy and Berkshire itself, saying some units are laying off workers as managers "look at the reality of the current situation."

He also said massive federal efforts to stimulate activity could pay off, at a possible cost of higher inflation.

"It has been a very extraordinary year," Buffett said. "When the American public pulls back the way they have, the government does need to step in.... It is the right thing to do, but it won't be a free ride."

DERIVATIVES

Buffett said housing prices have yet to stabilize broadly, that retailers may be under pressure for a "considerable period of time," and that he would not buy most U.S. newspaper companies "at any price."

He also said that in insurance, which comprises about half of Berkshire's operations, the earnings power "was not as good last year as normal" and "won't be as good this year."

Buffett had transformed Berkshire from a failing textile maker into a company with close to 80 businesses that sell such things as Geico car insurance, paint, ice cream and underwear.  Continued...