By Georgina Prodhan and Lucas van Grinsven

BERLIN, Sep 6 (Reuters) Almost any iPod owner will tell the same story: they wouldn't swap the iconic device for any alternative. But the battle is wide open for the hearts -- and pockets -- of the vast majority who still have no MP3 player.

The iPod commands an unusual loyalty among its fans. ''I wouldn't swap it for anything,'' says Nina Becker, a 27-year-old student, jogging down a street with the iPod's familiar white wires trailing from her ear plugs.

''The design is super,'' says Claudio Topani, an Italian musician browsing for gadgets at the IFA consumer electronics fair in Berlin, which ends on Wednesday.

But many people balk at the iPod's high prices -- top models sell for up to 0 -- or would prefer the convenience of a portable music player integrated into a mobile phone.

And although the iPod still commands more than 75 percent of the U.S. digital music player market and more than 50 percent of the global market, according to research firm NPD, sales have begun to slide as the threat from rivals becomes more real.

The phenomenal success of the iPod has not only inspired an army of imitators, most notably SanDisk's Sansa, but has now goaded the mighty Microsoft into action.

Microsoft plans to launch its answer to the iPod, the ''Zune'', later this year -- five years after Apple's first iPod went on sale -- in an apparent capitulation.

Microsoft's founder, Bill Gates, had maintained for years that mobile phones with integrated MP3 players would render separate portable music players redundant.

The Zune, made by Japanese electronics group Toshiba Corp., will have a 30-gigabyte hard-disk drive, wireless connectivity and a three-inch (eight-centimetre) liquid crystal display screen.

Microsoft's entertainment and devices chief said on Tuesday that the company would heavily market the Zune's wireless possibilities, which enable shared music experiences, to try to dislodge the iPod -- which so far has no wireless capability.

The software giant says there is plenty of room for growth in the digital music player market. U.S.-based Jupiter Research estimates that MP3 penetration was 25 percent of U.S. households and 18 percent of European households in 2005.

''Certainly everyone's awaiting the challenge from Microsoft and the announcement of Zune has created quite a lot of buzz,'' says Nate Elliott, a London-based analyst for Jupiter who specialises in the digital home.

He said that Microsoft was in a better position than any of Apple's other rivals to build an ''ecosystem'' -- including online music store -- although he cautioned that in his opinion Microsoft's PlayForSure software was not quite up to scratch.

MOBILE PHONE CHALLENGE Another threat to the iPod comes from mobile phone makers who are furiously integrating MP3 players into their handsets.

Close to 100 million phones sold this year will have a built-in music player and that number will grow to almost 800 million units by 2010 according to Strategy Analytics analyst Peter King.

That compares with 8.11 million iPods sold in the April-June quarter, up 32 percent from a year earlier but down from 8.5 million in the January-March quarter.

Many visitors to IFA said they would prefer to have many functions combined in one gadget -- concurring with Bill Gates's argument that mobile phones would eventually win the battle for ''share of pocket''.

IT engineer Armin, who declined to give his last name, said: ''I would rather take the mobile because I carry that already and do not want to carry around a second device.'' And Kurt Boz, a salesman at a store of mobile operator E-Plus in Frankfurt, said handsets with integrated MP3 players as well as cameras -- such as Sony Ericsson's K800 -- were flying off the shelves.

''Customers are very keen on the features,'' he said.

But Jurgen Smit, sales manager at electronics retailer Polectro, said he was confident iPod could keep its share of the market because ever more consumer electronics groups are making docks and ports to connect directly to the device.

Luxury car makers like BMW have also started fitting their models with standard iPod sockets.

''As long as you see that happening, iPod is not going to lose market share,'' Smit said.

Jupiter's Elliott says that, quite simply, no one has yet produced a device that can rival the iPod in terms of ease of use, good design and easy connectivity to online music stores such as iTunes.

''The proof of the pudding is in the eating -- and so far no one else's pudding is very good,'' he says.

REUTERS PKS ht2047