declining demand for handphone

HELSINKI (Reuters) - Sony Ericsson sparked fresh fear of crumbling consumer demand on Friday when the world's No 4 handset maker said it would sell barely half of the phones it sold last quarter.

Shares across the wireless sector dropped sharply on the news -- compounded by smaller rival Palm's overnight report of slumping quarterly sales -- and by 1229 GMT (8:29 a.m. EDT), Ericsson was down 8.7 percent and Nokia was down 5.5 percent.

Sony Ericsson said it expects to sell just 14 million phones in January-March, hit by weak demand and retailers cutting their inventories. Analysts polled by Reuters in January expected between 15.5 million to 21.8 million phones sold.

"Investors are questioning the whole market now, even though I think the issue for Sony Ericsson is more company specific," said Jari Honko, analyst with eQ Bank.

Overnight, U.S. rival Palm Inc reported a widening loss for the December-February quarter and said revenue sank 70 percent from a year ago.

The cellphone industry has entered its toughest year ever as consumers rein in spending and retailers try to clear inventories of unsold phones after bleak Christmas sales.

"The market, overall, continues to be very challenging," said Gartner analyst Carolina Milanesi.

Fears over the future of the mobile market also sent shares in chipmakers sharply lower, with Infineon down 6.6 percent and STMicro 5 percent lower.

VERY WEAK QUARTER

Sony Ericsson said it expected to make a pretax loss of 340-390 million euros ($459 million-$526 million) in the quarter as it heads into a second year of losses.

"It's a real catastrophe. Those are very big losses and they are probably losing a lot of market share," said Greger Johansson, from analyst firm Redeye.

"It's obvious that the volumes are much lower than the market had thought. And first and foremost, the losses are much, much bigger," he said.

Sony Ericsson, the no. 4 global handset maker after Nokia, Samsung and LG, said it expects gross margins to decline both year-on-year and sequentially.

"What is happening now is that everyone will be forced to cut their forecasts for Sony Ericsson and Ericsson," said analyst Hakan Wranne from Swedbank.

Ben Wood, head of research at CCS Insight said Sony Ericsson was suffering most from the weak portfolio and the challenging market conditions it faces in European markets.

"With competition intensifying it is going to be a tough task to regain momentum until new products appear and economic conditions improve," Wood said.

Sony Ericsson's success has been built on a strong offering of mid-range phones with high-quality cameras and music players, but this part of the cellphone market is seeing the sharpest fall this year as operators dole out subsidies to more expensive phones.

SMARTPHONES TO HOLD

Qualcomm, the world's largest cellphone chip maker, said on Friday it was seeing strong demand for higher-end smartphones in spite of the weak economy.

Analysts, on average, expect sales of feature-jammed smartphones to grow between 10 percent and 20 percent this year.

"Consumer demand for higher-end smartphones remains strong as the demand for wireless Internet, multimedia, and value-added services continues to grow," Jing Wang, a Qualcomm executive vice president, said in an e-mail to Reuters.

"While inventories have contracted, global 3G adoption is continuing to grow as subscribers migrate from second-generation to third-generation networks and manufacturers are shipping more 3G devices this year than last year," he said.

TSMC, which makes chips for Qualcomm and Texas Instruments, said on Friday it would end all unpaid leave for employees from April as orders have risen recently.

The move came after TSMC sharply raised its first-quarter sales and margin forecasts last week, due to rush orders from China, indicating a trend of falling sales that began six months ago had hit bottom.

($1=.7412 Euro)
By Tarmo Virki, European technology correspondent
Additional reporting by Baker Li in Taipei and Stockholm bureau; Editing by David Cowell and Simon Jessop