The investment bank posted a 40% profit decline for its third quarter Tuesday, citing a steep drop in its huge trading business.

For the quarter ended last month, New York-based Goldman  made $1.9 billion, or $2.98 a share. Revenue fell 28% from a year earlier to $8.9 billion.

Analysts surveyed by Thomson Financial were expecting the firm to make $2.28 a share, down from $5.25 a year earlier. But the Street’s profit forecast has dropped sharply along with mom and pop’s interest in the stock market.

In July, the median analyst estimate had Goldman making around $4 a share. But volume on U.S. stock exchanges tumbled 26% in the third quarter, Soleil Securities analyst Carole Berger says, starving the big banks of commission revenue.

The most glaring sign of commission brownout came last month when Jefferies blamed a 47% profit decline on “painfully slow” trading.

Accordingly, revenue in Goldman’s trading and principal investments business slipped 36%, to $6.4 billion in the third quarter from $8.8 billion a year ago. The setback exposes a vulnerability at Goldman, where trading accounted for a third of revenue a decade ago but lately has been carrying twice that weight or more.

“While economic conditions continue to be challenging in a number of important markets, our focus is on helping our clients achieve their goals,” CEO Lloyd Blankfein said in a press statement.

The slowdown means a setback for Goldman’s well compensated workers. The firm set aside $3.8 billion in the latest quarter for pay and perks, meaning the firm has accrued $370,706 for each worker in the first nine months of 2010.

That’s down 30% from the equivalent figure a year ago.

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Tuesday’s report comes as investors are reassessing the prospects for the biggest banks in the wake of financial reform legislation, higher capital rules and legal challenges. Bank of America whimpered on Tuesday that financial reform legislation will cost it $10 billion.

Goldman this summer paid $550 million to settle Securities and Exchange Commission claims that it misled investors in a bubble-era debt deal, seemingly closing a chapter in that seamy story. The firm has promised to deal better with conflicts of interest such as those exposed in the SEC case, and is promising a full report in December.

Yet despite those moves and the widely held expectation that Goldman will outmaneuver its rivals on the reregulated financial playing field, Goldman shares are down 8% this year and 18% from their pre-SEC high.

One explanation: uncertainty. Just over the past month, big mortgage banks have been hit with claims that they botched foreclosure procedures. Goldman doesn’t have a major mortgage business and thus isn’t likely to be hurt by this case. But it’s clear investors are still worrying about the next shoe to fall.

Goldman shares dropped 1% in premarket trading Tuesday to $152.31.