UPDATE 2-Disruption to medical business takes toll on Smiths Group

* Annual revenue falls 2 percent at medical unit

* Profit falls just short of forecast

* Shares fall as much as 9 percent (Adds details, background)

Sept 21 (Reuters) - The suspension of some of its medical products in Europe hit annual profit at British engineering company Smiths Group, sending its shares down over 9 percent.

The weak results come only a week after it said that talks with U.S.-based ICU Medical Inc over a possible 7 billion pound-plus merger of their healthcare businesses had fallen through.

Smiths had warned in July that revenue at its medical unit, previously its largest, would drop by 2 percent as it lost two U.S. contracts and some of its products were temporarily suspended in Europe due to the loss of certifications ahead of new EU regulation.

Revenue at the medical division, which makes products including respiratory devices and catheters, fell as forecast to 885 million pounds ($1.17 billion) for the year ended July 31.

Full-year operating profit rose 3 percent on an underlying basis to 544 million pounds but fell short of a company compiled consensus of analysts' estimates of 548 million pounds.

Shares in the FTSE 100 company were down 6.6 percent at 1,485 pence by 0835 GMT, having lost as much as 9 percent in earlier trading, the biggest drag on the FTSE 100 index of leading stocks.

BOTTLING BUSINESS SOLD

The company, which also makes airport baggage scanners, bomb detectors and industrial products, said it expects Smiths Medical to return to revenue growth in the second half of this financial year as it completes the transition to a new European registration system.

Total group revenue rose 2 percent to 3.21 billion pounds ($4.26 billion) in the year, helped by 5 percent revenue growth in its John Crane business, which supplies components to the oil and gas industries.

John Crane overtook Smiths Medical as the group's biggest revenue contributor this year compared to last year.

It expects to sustain that rate of growth in the current financial year.

The company, which traces its roots back to a jewelry shop in south London in 1851, said on Friday it signed a deal to sell its water bottling business for $40 million to California's Amsino Healthcare.

The company also said Smiths Detection won contracts in U.S. and China to provide screening equipments at airports.

The U.S. contract, which is from Transportation Security Administration, is worth $70 million and the systems will be deployed to U.S. airports as security equipment upgrades for checked baggage screening, Smiths said. ($1 = 0.7561 pounds) (Reporting by Muvija M and Arathy S Nair in Bengaluru Editing by Patrick Graham/Keith Weir)