In a further sign of the difficult times facing the UK film industry, Oscar winning special effects company, The Mill, is pulling out of feature film. The London based company is blaming the move on the volatile nature of the industry and a desire to concentrate on its advertising activities.

A huge blow to London's effects business, the move will also mean significant redundancies from the company. The core Mill Film team of 35 people regularly rises to around 150 staff via a freelance talent base.

The Mill CEO Robin Shenfield insisted that Mill Film - which has just completed extensive work on Harry Potter And The Chamber of Secrets - was a profitable business, but added that there was possibility that it would become unprofitable in the short term.

"There's an inherent risk of volatility in the film business, and I don't think we have an appetite to take these risks any further," he said. "At the same time our commercials business has lots of opportunity. Advertising is a tough market too, but it's a strong and continuous market. I didn't want to jeopardise the focus on commercials by potentially having losses in Mill Film."

The closure of Mill Film comes after a tough time for UK special effects companies, which is heavily reliant on inward investment from big budget Hollywood films. Inward investment slumped 57% in 2001 and has only slightly improved this year - with just three films, Die Another Day, Tomb Raider 2 and Harry Potter And The Chamber Of Secrets, providing the bulk of the business for effects houses.

Also affecting UK post-production houses is the relative strength of the pound against the dollar, which has recently made London prices appear less competitive to US studios.

Shenfield said he felt the business would be quieter in the next few months: "For us to be at the leading edge and compete with the best in the US, we needed to be of a certain size and scale. But that means you are exposed if there are gaps in the work flow."

However, the timing of the Mill Film's closure comes as something of a surprise, as 2003 is expected to be a slightly better year with the third Potter film, Helen Of Troy and HBO's King Arthur project all destined already for London effects work.

The impact of Mill Film's closure is still being weighed by London effects industry. One observer commented that the closure of Mill Film had shrunk London's capacity to handle effects films by up to 20%. "London gets filled up very easily - one or two films can fill the town up. This could send a message to the US that the UK industry has just got smaller."

Others paid tribute to the work Mill Film had done in making London an important effects base. "The work Mill Film did in bringing work to London has been valuable to all of us," commented Colin Brown head of rival effects outfit Cinesite Europe.

However, Brown added that Mill Film's closure did not mean the London talent pool would shrink, saying that most of their employees were freelancers who could be employed elsewhere.

The Mill - whose investors include Ridley and Tony Scott - was originally founded in 1990 to create effects for commercials, with Mill Film set up as a division in 1997. Four years later, its work on Gladiator won an Oscar. Last year, The Mill was bought out by its management with backing from 3i after Candover sold its interest for more than $14.5m (£10m) as part of a $35m (£24m) buy-out. In July this year, the company opened its first office in New York.