UK telecom giant, BT Group, announced a 31% increase in first quarter profits yesterday, driven by strong demand for broadband connections and IT network services, along with a one-time tax credit.

The company reported a profit of £607 million (US$1.25 billion), up from £464 million in the same three month period a year earlier. Excluding the £119 million tax gain, net earnings increased by 5.4%, roughly in line with analysts’ expectations.

Overall revenue was up 3% to 5.03 billion, slightly higher than most forecasts.

Retail broadband services contributed significantly to the results, with BT adding 175,000 new high-speed internet customers in the three month period ending June 30. This represented 38% of all broadband additions in the UK market, compared to just 32% in the previous quarter and 30% in the first fiscal quarter of 2006.

Despite these positive growth figures, however, shares in BT dropped over 5% on the London Stock Exchange, due to the company’s lower-than-expected profit margin.