Shares in Falkland Oil & Gas (FOGL) have fallen sharply after the company said it would give up on one of its oil wells, not far off the coast of the South Falklands.
It started drilling the Toroa well at the end of May.
Despite its optimism at the time, it now says it there are no hydrocarbons there and it will plug the well.
Shares in FOGL fell by more than 60% before recovering slightly to close 53% lower at 95.5p.
But, it said it still hoped there was oil in the area, which is about 90 miles south of the Falklands Island capital, Stanley.
Several UK oil companies are searching for oil in the Falklands, despite strong opposition from Argentina.
Although they are run by the British, Argentina still claims it owns the Islands which it calls the Islas Malvinas. It has formally asked the United Nations to bring the UK into talks over their sovereignty.
Argentina invaded the Falklands in 1982, before a UK taskforce seized back control in a short war that claimed the lives of 649 Argentine and 255 British service personnel.
Despite the exploration setback, Falkland Oil and Gas will continue to search for oil in the area.
It believes the Toroa prospect, in which it has a 49% interest, has around 1.7 billion barrels of recoverable oil and is now carrying out further assessments.
The company pointed out that development of the field was in its early stages.
"Whilst the results of the Toroa well are disappointing, it has to be remembered that this is the first well in a previously undrilled frontier basin," the firm's chief executive Tim Bushell said.
"We believe that these results have helped to reduce some of the key risks of the plays in the deepwater areas of our licences."
Shares in Falkland Islands Holdings, which has an 8% stake in Falklands Oil & Gas also fell, by 17%.
The Falkland Islands have become a hotbed of drilling activity for smaller UK-listed explorers.
Last month, Rockhopper Exploration said it was looking to raise £48.5m after striking larger-than-expected reserves of oil in the region.