SAN FRANCISCO, Jan 17 Intel Corp.'s quarterly profit fell 40 percent amid an industry pri

SAN FRANCISCO, Jan 17 (Reuters) Intel Corp.'s quarterly profit fell 40 percent amid an industry price war, and the top chipmaker's stock fell 4 percent on Tuesday after it forecast gross margins would not improve this year.

Intel, which supplies processors for about three-quarters of the world's personal computers, also said it expected sales for the first quarter of between $8.7 billion and $9.3 billion, compared to the average Wall Street forecast of $8.9 billion.

But it said gross margin would be about 49 percent in the first quarter and 50 per cent for 2007. Fourth-quarter gross margin was 49.6 per cent, up from 49.1 percent in the third quarter but down from 61.8 per cent a year earlier.

''If Intel is saying they don't expect any gross margin increase this year, that's a disappointment,'' said Jane Snorek, technology analyst at First American Funds in Milwaukee.

Intel shares fell to $21.40 in extended trading on concerns about the margin outlook, which had improved in the past two quarters.

Chief Financial Officer Andy Bryant said fourth-quarter margins were helped by higher sales and new products, though some of that was offset by unused capacity at some factories and its flash memory chip operations.

''When revenue falls you expect margins to come off a little bit. We are also getting ready to start production on the 45-nanometer process and there are extra costs associated with that,'' Bryant said.

Bryant was referring to the next generation of chipmaking equipment that will cost Intel billions of dollars to deploy but let it make smaller, faster chips.

Cody Acree, an analyst with Stifel Nicolaus, reckoned Intel's margins would improve steadily throughout the year as the effects of many negative factors would fade after the first quarter.

That would put gross margin percentage in the mid-50s if pricing and other factors hold steady, he said.

''The underlying fundamentals ought to be there, and that will be much more evident ... after the first quarter,'' Acree said.

Intel's fourth-quarter net profit, including special items, was $1.5 billion, or 26 cents per share, compared to $2.45 billion, or 40 cents per share, a year earlier. Excluding restructuring charges and gains from the sale of assets, the profit was 25 cents per share, in line with the average Wall Street forecast for adjusted earnings.

Revenue was $9.7 billion, down 5 percent from a year ago, though it was ahead of the average forecast of $9.4 billion.

Santa Clara, California-based Intel has been locked in a price war with chief rival Advanced Micro Devices Inc.. Over the past year, Intel shares have fallen nearly 15 percent while AMD's have lost nearly half their value.

Intel's price cuts have mostly come on inventories of older chips it was left holding as customers switched to AMD's more efficient and powerful products.

Asked about inventory levels in the current quarter, Bryant said he hoped to keep them the same as in the fourth quarter.

''If we can kind of stay flat I'd be pretty satisfied with that result,'' Bryant said. ''It's tough to hold it in a declining revenue environment, but I think we can do it.'' Although Intel's ability to charge more for its new chips lifted average selling prices in the quarter, Bryant said he expects the market to stay ''competitive'' this year.

The price war has bitten more deeply into AMD's bottom line, and the Sunnyvale, California-based company said last week its profit and revenue would fall short of analysts' estimates. Its stock is valued at 11.6 times expected 2007 profit, compared to nearly 19 times for Intel shares.

''The competitive pressures with AMD were more severe than we had thought,'' said JoAnne Feeney, managing director of FTN Midwest Securities. ''Intel continues to struggle to regain its market share.'' REUTERS PKS BST0615