BofA Merrill Lynch lowered its 2010 growth forecast for global semiconductor industry and downgraded ten chipmakers, including Intel Corp , turning more cautious on the group on expectations of a modest overshoot in global supply chain inventories.

While we believe the correction will likely prove short and shallow, we think any hint of a correction in the supply chain could punish (semiconductor) stocks, BofA Merrill wrote in a note to clients.

The brokerage downgraded Intel, the world's largest chipmaker, to neutral from buy, and made similar rating changes to rivals LSI Corp , Marvell Technology Group Ltd , Texas Instruments Inc and Dutch chip equipment maker ASML Holding NV .

BofA Merrill, which cut its 2010 growth estimate for the sector to 18 percent from 21 percent, also downgraded Microchip Technology Inc , Maxim Integrated Products Inc , National Semiconductor Corp , Power Integrations Inc
and British microchip designer ARM Holdings Plc by a notch each to underperform.

After a period of rapid replenishment of inventory as well as normalization of semiconductor shipments to true consumption levels, inventories in the supply chain are approaching a level that suggests a modest overshoot versus equilibrium levels, the brokerage said.

Barring a sharp upturn in the global economy, our indicators point to the potential for an inventory correction, thus rendering the risk-reward associated with ownership of chip stocks unattractive, it added.

In addition, recent indications from the Asia PC supply chain suggest a downward bias to PC build forecasts in the near-term, the brokerage said.

Given the importance of PC sales to semiconductor sales, more than 40 percent of which are directly or indirectly linked to PCs, the weakness in the PC supply chain cannot be ignored, BofA Merrill said.

The brokerage revised its price targets on European semiconductor stocks to reflect the risk of negative news flow in the coming quarters.

Despite the brokerage's cautious view on the sector, it still expects continued growth in electronic end demand in conjunction with an economic recovery.

Global semiconductor sales in the third quarter rose 19.7 percent sequentially, the Semiconductor Industry Association said earlier this month, as it forecast an upbeat full-year sales.

Intel shares were down nearly 3 percent in pre-market trade Thursday, after closing at $20.12 Wednesday.

Shares of ASML slid 4 percent to 20.52 euros and ARM was down 3 percent at 162.6 pence by 1134 GMT Thursday.

(Reporting by Tenzin Pema in Bangalore; Editing by Anil D'Silva)