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Shares of Advanced Micro Devices fell nearly 10 per cent on Friday after the number two maker of processors for PCs warned of substantially lower profits caused by a price war with Intel, its bigger rival.

AMD said its fourth-quarter gross margin and operating income were “impacted by significantly lower microprocessor average selling prices, which largely offset a significant increase in unit sales”. Operating income was “expected to be positive but substantially lower than in the third quarter”, it said, and sales should increase 3 per cent to about $1.37bn.

Adding in expected revenues of $350m from ATI, its graphics chipmaker acquired in October for $5.4bn, a sales total of $1.72bn is below analyst expectations of $1.85bn for the fourth quarter. AMD’s shares fell 9.51 per cent to $18.26 in New Yrok trading.

Sumit Dhanda, semiconductor analyst at Bank of America, described the figures as a big miss. He said AMD appeared to be under significant price pressure in its desktop and server processor businesses, largely due to Intel gaining market share.

Joe Osha, Merrill Lynch semiconductor analyst, lowered his 2007 earnings per share estimate to 15 cents, compared with a market consensus of $1.11, citing competitive pressures from Intel, slower demand and the need to digest its ATI acquisition as growth inhibitors.

A slower recovery than expected in ATI’s graphics card business and AMD’s need to ramp up capacity meant that the company could lose money in the first half of the year, he warned.

Glen Yeung at Citigroup downgraded AMD from “buy” to “hold”, saying it was coming under acute pricing pressure in its high-end server processors business from Intel.

Intel has turned the tables on AMD in recent months, introducing its first new architecture in five years and beating AMD to the launch of quad-core processors – chips with four brains. Intel has moved to cheaper manufacturing, based on smaller 65-nanometre circuitry, a year ahead of AMD.

Intel will announce its fourth-quarter results on Tuesday, with analysts expecting it to report market share gains.

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