RadioShack Corp's quarterly earnings fell on weakness in its T-Mobile business and higher costs, prompting the U.S. consumer electronics chain to cut the top end of its full-year profit outlook.

The news dragged the company's shares down nearly 2 percent in premarket trading.

RadioShack, which in February alleged that Deutsche Telekom AG's T-Mobile USA unit had materially breached their contract, said both sides continued to work closely to resolve the issues.

Analysts have raised concerns about RadioShack's tie-up with T-Mobile.

RadioShack gave up a lot of compensation from AT&T and Sprint to carry T-Mobile, and this partnership doesn't appear to be panning out the way management expected, RBC Capital Markets analyst Scot Ciccarelli said last week.

Sales at company-operated stores and kiosks open at least a year fell 0.6 percent in the first quarter, and the company blamed the decline mainly on weak T-Mobile postpaid wireless sales.

In February, RadioShack said T-Mobile's product offerings were not competitive with those of other carriers.

At the time, Jim Gooch, who will become RadioShack's chief executive officer in May, said T-Mobile had materially breached its contract during the fourth quarter, and legal discussions were under way. RadioShack has not given any further details on the alleged breaches.

The discussions have been constructive, and RadioShack expects the matter to be resolved, the company said in a statement on Monday. But it added in a regulatory filing that that the outcome could have a material adverse effect on results.

RadioShack has sought to counter weak demand for converter boxes, antennas and other accessories by selling wireless devices and calling plans.

But it faces stiff competition from larger rival Best Buy Co Inc , online retailers like Amazon.com and some carriers that sell phones directly to consumers.

Fort Worth, Texas-based RadioShack reduced the top end of its 2011 profit outlook to $1.80 a share from $1.90, while keeping the low end at $1.60. It still expects sales to rise at a low-to-mid single-digit percentage rate in that period.

In the first quarter, it earned $35.1 million, or 33 cents a share, down from $50.1 million, or 39 cents a share, a year earlier.

The chain saw higher costs from the rollout of its wireless kiosks in Target Corp stores. The results also included costs of 2 cents a share from early retirement of debt.

Sales rose 2.1 percent to $1.06 billion, missing the analysts' average estimate of $1.07 billion.

Shares of RadioShack were down 1.8 percent at $15.55 in trading before the market opened.

(Reporting by Dhanya Skariachan, editing by Maureen Bavdek, John Wallace and Lisa Von Ahn)

Radioshack T-mobile Radioshack