By Steve Slater and Clara Ferreira-Marques

LONDON (Reuters) - Barclays said profits fell in the first quarter and refused to rule out a rights issue as it took a 1 billion pound hit for the impact of the credit crunch.

That was less than the hit taken by many other banks, but its capital cushion remains one of the thinnest among European banks, especially after rivals Royal Bank of Scotland and HBOS unveiled big rights issues.

Barclays, Britain's third-biggest bank, said on Thursday the writedown for its investment bank arm Barclays Capital (BarCap) was net of a 700 million pound gain on the fair valuation of debt it carries on its own books. The bank said 500 million pounds of that gain was reversed in April.

Faced with the writedowns and slower income growth while financial markets remain fragile, Finance Director Chris Lucas told analysts he was comfortable with an average forecast for 2008 profits of 6.4 billion pounds, which would be down 10 percent from 2007.

By 10:30 a.m., Barclays shares were down 3.4 percent at 412 pence, leading a weak bank sector lower. Analysts blamed the drop on concern it hasn't boosted its capital position, potentially constraining future growth.

The bank, which did not disclose the extent of its first quarter profit fall, expects its core tier 1 capital ratio to be slightly lower at the end of June than the 5.1 percent it reported at the end of 2007. It intends to lift this to 5.25 percent "in time".

Lucas said Barclays was keeping its options open in regard to improving capital.

When asked if that meant it could launch a rights issue, he said: "We are clear that all options remain available ... we are not going to rule in or rule out anything."