"Nothing can stop us now. A new generation is taking over."

More than a year after the Nordic internet boom peaked these confident words - the title of a book by Johan Stael von Holstein, one of Sweden's best-known IT entrepreneurs - seem almost embarrassing. Originally priced at SKr377, the book was recently being sold for just SKr80 in a central Stockholm bookstore.

Even the size of this discount is not as great as the fall in the price of Icon Medialab, the internet consultancy which Mr von Holstein co-founded. Its shares have fallen more than 90 per cent from their peak.

In the Nordic region, as elsewhere, much of the hype and buzz surrounding the internet has faded. But somehow the sense of deflation seems worse here. This, after all, was the place that had a clear internet lead and where some of Europe's most interesting IT clusters were located. Stockholm was dubbed "the internet capital of Europe". It's not that any other city has replaced it, simply that it doesn't seem such an exciting accolade any more.

Internet brokers, online recruitment agencies, e-commerce companies, internet consultants have all felt the sharp change in sentiment. Mr von Holstein is not the only high-profile entrepreneur to see his star wane. The same thing has happened to Jonas Birgersson, who founded Framtidsfabriken (the Future Factory, better known simply as Framfab), the internet consultancy which was once Europe's largest but which has just carried out an emergency rights issue to stave off bankruptcy.

It's not just the bursting of the dotcom bubble. Delays in the launch of the mobile internet have also hurt because the mobile internet is, above all, the sector of Nordic IT supremacy thanks to Nokia and Ericsson.

Unfortunately, problems at Ericsson, which is laying off up to 22,000 people this year because of heavy losses in its handsets division and a sharp drop in profits in its systems business, have overshadowed the whole of the Swedish IT sector.

In neighbouring Finland, Nokia may have increased its dominance in handsets, but even its shares are well off last year's highs. Meanwhile, Sonera, the Finnish mobile phone operator that almost became a by-word for the exciting possibilities of the mobile internet, found its shares more than 90 below their peak at one point earlier this year.

The change of sentiment can be seen in the almost complete lack of initial public offerings in Nordic IT as well as in the fact that many start-ups have been finding it harder to attract funding. Instead of IPOs, the talk is of consolidation.

"Many companies were set up either to float or be bought. Floating is not an option in the current market. Being bought is the only game in town," says Bjorn-Erik Willoch, chief executive of Cap Gemini Ernst & Young's Nordic operations.

Venture capitalists still have money, but they are much more cautious about how they invest it. One senior Swedish financier says: "My worry is that some good companies which ought to survive may not get finance in time to stave off bankruptcy."

Uncertainty is just as prevalent in Finland. "Our revenues are growing strongly, we are in the black, and we have kept every promise we have made. But still investors are cautious because of the overall market situation," says Harri Johannesdahl, chief executive of Jippii, a listed Finnish IT group.

To imply that all is gloom would be wrong, however. According to the 2001 IDC/World Times Information Society Index (ISI), Nordic countries occupy four of the top five places when it comes to IT development and internet maturity. Sweden heads the listing for the second year running, while Finland and Norway have displaced the US from second to fourth position.

IT, in other words, is much more pervasive in the Nordic region than elsewhere. It is not just that mobile phone and internet penetration rates are higher. Or that R&D spending as a percentage of GDP is higher. It is because IT is reaching into all age groups, and all sectors of society, whether public or private.

Leif Pagrotsky, Swedish trade minister, says: "IT is now permeating all sectors of society. That tells me we are reaping the benefits in terms of productivity and international competitiveness." He says this is one reason the Swedish inflation has remained so low, despite the booming economy of the last three years.

Certainly, there is a great deal more focus now on how the old economy companies are using IT. Indeed if Sweden is to gain international competitiveness, it will depend on the way that big engineering groups, such as SKF, Sandvik, Volvo and Atlas Copco, use IT to cut costs and lift efficiency.

Three key challenges remain. One is to ensure that the youthful, entrepreneurial, risk-taking approach associated with Messrs von Holstein and Birgersson does not disappear with their demise. They were more than IT figureheads: they represented an exciting new dynamic in a country that lacked an entrepreneurial culture for much of the twentieth century because of its cosy welfare mentality and high taxes.

(It's not that there is a complete contradiction between old Sweden and new Sweden. One reason that IT has thrived is because it is taking place outside of old Sweden. It is not unionised and many of the new companies are registered overseas to avoid punitive Swedish taxes.)

There is already clear evidence that the brightest and best graduates are once again beating a path to the doors of investment banks and management consultancies, rather than setting up on their own.

But optimists speak of a "Bjorn Borg" effect, with future entrepreneurs being encouraged by the example of the pioneers, just as Borg inspired a generation of Swedish tennis players. "The option of doing something on your own is on the agenda again. It doesn't have to be just IT," says Kjell Nordstrom, a management watcher. guru.

Challenge number two is to get more foreign IT experts to come to the Nordic states. Kista in Sweden, and Oulu and Helsinki in Finland have all emerged as significant clusters. But the foreign companies which have set up competence centres there are mainly employing native Swedes and Finns. Foreigners themselves seem deterred by high taxes, low salaries, and long dark winters.

The third challenge is to get more entrepreneurs to build companies, rather than sell out at the earliest juncture. Not every company can be a Nokia, but the Finnish company shows that a small home market need be no handicap when it comes to building a world-class business.

Pessimism can be overdone just because market conditions have changed so radically from a year ago. But many lessons have been learned, and the experience - even of failure - will be useful for future ventures. There is still a depth of knowledge about IT, and a love of the latest gizmos among Nordic consumers, that should hold the region in good stead in the years to come. It will still be a great place to test new concepts.

Mr Pagrotsky at the Swedish Trade Ministry says: "When people are less enthusiastic about IT, they will be less impressed by us being in the lead in this field. This is a temporary phase. My view is that fundamentals will bear fruit in the long run."