Shares in Woolworths have fallen by 8% after it warned that a contract it has to supply Tesco with CDs and DVDs may not be renewed when it ends in 2007.
Woolworths says Christmas trading was "satisfactory"
The news overshadowed comments from the retailer that after steady Christmas trading it was expecting to report profits at the top end of forecasts.
Like-for-like sales, which strip out the impact of store openings, fell 0.8% in the six weeks to 14 January.
This was better than the 3.9% fall in sales for the 50 weeks to that date.
Woolworths said that its Entertainment UK arm (EUK) would see profits cut by £10m next year as a result of falling sales and following the renegotiation of an ongoing deal to supply products to Tesco.
The retailer also warned that its contract with Tesco could come to an end in 2007.
"We'll continue to supply them until February 2007, but we haven't yet agreed to supply them post that date," said chief executive Trevor Bish-Jones.
"At the moment our view is that we probably won't continue to trade with Tesco after that."
The news was also compounded by Woolworths announcement that changes to accounting rules would lead to increased leasing charges.
Woolworths said on Wednesday that under old accounting rules, its annual profits were set to be between £50m-£60m.
However, as a result of the changes, full-year profits for the current financial year under the new rules are set to be about £17m lower.
Shares in the group fell as much as 10% as investors digested the news. By 1045 GMT its stocks had settled 8.84%, or 3.25 pence lower, at 33.5p.
News of the Tesco contract overshadowed the better sales performance at Woolworths over the key festive trading period.
"Despite a competitive environment, Christmas trading across the group proved satisfactory," Woolworths said in a statement.
"Our approach going into the key Christmas trading period was to maximise full-price sales, to drive margin and to manage our product mix carefully."
Woolworths added that its gross profit margin was 0.4% higher over the latest Christmas period than at Christmas 2004 as it had decided to maximise full price sales rather than cut prices.