Chip stocks fell on Thursday after Bank of America Merrill Lynch downgraded the sector on a possible inventory correction, although two of Europe's top chipmakers were upbeat about recovery prospects.

BofA Merrill Lynch lowered its 2010 growth forecast for the global semiconductor industry and downgraded 10 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 downgrade came two weeks after Morgan Stanley analyst Mark Lipacis noted that the good news for many semiconductor stocks had already been baked in and PC component suppliers would have a difficult time beating expectations.

Auriga analyst Daniel Berenbaum said notions of a strong rebound for the industry next year may not be realistic.

Things wound up better this year than some of our worst fears, but I think demand has been pulled forward, he said. I'm concerned that everybody expects a corporate PC refresh in 2010 -- maybe it'll happen, maybe it won't happen, but I do believe it's already built into stocks.

Shares of chipmakers fell across the board on Thursday. Bellwether Intel dropped 4.5 percent, smaller rival Advanced Micro Devices Inc 2.7 percent and Infineon Technologies AG fell 7 percent. The DJ STOXX European Technology Index <.SX8P> shed 2.9 percent and the Philadelphia semiconductor index <.SOXX> fell 3.5 percent.

German chip group Infineon was bullish on its fiscal 2010 outlook, saying sales could grow by more than 10 percent if the world economy continued to grow at its present pace. But analysts weren't convinced.

Traders saw as negative remarks by Infineon Chief Executive Peter Bauer that the company would need to boost profit margins well above 10 percent as it seeks to generate sustainable earnings amid the current recovery.

Despite Infineon beating consensus estimates, we expected better numbers for the fourth quarter, as well as a more optimistic outlook for the running quarter, following bullish statements from competitors, Sal Oppenheim analyst Juergen Wagner wrote, keeping a reduce rating on the stock.

Dutch chip equipment maker ASML Holding NV -- whose order book is viewed as a barometer for major chipmakers such as Intel or Taiwan Semiconductor Manufacturing Co Ltd <2330.TW> -- also said that it still expects order intake in October-December to be at least on the same level as in the previous quarter.

But shares in ASML closed down 6.14 percent after BofA Merrill Lynch downgraded the stock to neutral from buy.

Around the globe, chipmakers are recovering from a prolonged downturn. Samsung Electronics Co Ltd <005930.KS>, the world's top maker of memory chips and LCD screens, in late October posted its best quarterly net profit and forecast a strong 2010 due to global turnaround in the sector.

Earlier this week, research firm Gartner raised its forecasts for the chip market in 2009, saying it now sees it falling 11.4 percent to $226 billion, compared with a previous forecast for a 17 percent fall.

Next year Gartner sees the market growing 13 percent.

Taiwan's TSMC, the world's top contract chip maker, also posted its biggest quarterly net profit in a year last month and was bullish about future capital spending, aiming to invest $2.5 billion on upgrading its technology.

(Additional reporting by Tenzin Pema, S. John Tilak in Bangalore; Nicola Leske in Barcelona and Hakan Ersen and Tyler Sitte in Frankfurt; Editing by David Cowell and Gerald E. McCormick)