Price competition is sparking up again between the world's largest chip makers, Intel Corp. (Nasdaq: INTC) and Advanced Micro Devices (NYSE: AMD).

As Intel took a technological lead late last year, AMD responded with frantic price cuts after a weak start to its first quarter, Needham analyst Y. Edwin Mok said in a note to clients on Tuesday.

Mok contends AMD has cut prices three times in three weeks to spur demand.

Intel will likely feel pressured to respond with cuts of its own, Mok contends, driving down profits for both firms. We would avoid both names here, as believe lower prices and higher capital spending may continue to limit margins.

He says AMD is offering very competitive pricing to Dell (Nasdaq: DELL) in order to win more market share, and that as a result, is helping penetration at the computer maker.

Clearly, this OEM is playing AMD and Intel off one another, said Mok.

The launch of Microsoft's (Nasdaq: MSFT) new flag ship operating system, Windows Vista, is not helping accelerate the PC market. Results from Asian PC makers show seasonal declines, he says, demonstrating that the launch of Windows Vista is not driving a pop in near-term demand.

Shares of AMD rose 3.17 percent, or 46 cents, to $14.73 in Wednesday afternoon trading and the New York Stock Exchange. Intel shares rose 1.34 percent or 28 cents, to $21.181 on the Nasdaq Stock Market.