Sony Ericsson sparked fresh fear of crumbling consumer demand on Friday when the world's No 4 handset maker said it would sell barely half of the phones it sold last quarter.

Shares across the wireless sector dropped sharply on the news, with Ericsson 7 percent lower and top handset maker Nokia 4.7 percent down by 0840 GMT.

Sony Ericsson said it expects to sell just 14 million phones in January-March, hit by weak demand and retailers cutting their inventories. Analysts polled by Reuters in January expected between 15.5 million to 21.8 million phones sold.

Investors are questioning the whole market now, even though I think the issue for Sony Ericsson is more company specific, said Jari Honko, analyst with eQ Bank.

Overnight, smaller rival Palm Inc reported a widening loss for the December-February quarter and said revenue sank 70 percent from a year ago.

Sony Ericsson said it expected to make a pretax loss of 340-390 million euros ($459 million-$526 million) in the quarter as it heads into a second year of losses.

It's a real catastrophe. Those are very big losses and they are probably losing a lot of market share, said Greger Johansson, analyst firm at Redeye.

It's obvious that the volumes are much lower than the market had thought. And first and foremost, the losses are much, much bigger, he said.

Sony Ericsson, the no. 4 global handset maker after Nokia, Samsung and LG, said it expects gross margins to decline both year-on-year and sequentially.

These disappointing results come as little surprise given the current weakness of the Sony Ericsson portfolio and the challenging market conditions it faces in the markets where it is strongest, said Ben Wood, Research Director at CCS Insight.

With competition intensifying it is going to be a tough task to regain momentum until new products appear and economic conditions improve, Wood said.

Sony Ericsson's success has been built on a strong offering of mid-range phones with high-quality cameras and music players, but this part of the cell phone market is seeing the sharpest fall this year as operators dole out subsidies to more expensive phones.

SMARTPHONES TO HOLD

Qualcomm, the world's largest cell phone chip maker, said on Friday it was seeing strong demand for higher-end smartphones despite the weak economy.

Analysts on average expect sales of feature-jammed smartphones to grow 10-20 percent this year.

Consumer demand for higher-end smartphones remains strong as the demand for wireless Internet, multimedia, and value-added services continues to grow, Jing Wang, a Qualcomm executive vice president, said in an e-mail to Reuters.

While inventories have contracted, global 3G adoption is continuing to grow as subscribers migrate from second-generation to third-generation networks and manufacturers are shipping more 3G devices this year than last year, he said.

TSMC, which makes chips for Qualcomm and Texas Instruments, said on Friday it would end all unpaid leave for employees from April amid rising orders recently.

The move came after TSMC sharply raised its first-quarter sales and margin forecasts last week, due to rush orders from China, indicating a trend of falling sales that began six months ago had hit bottom.

(Additional reporting by Baker Li in Taipei and Stockholm bureau; Editing by David Cowell)

Electronics Sony Qualcomm