Cellphone maker Nokia said on Wednesday it would cut production at its key Salo plant in Finland as demand for handsets has dropped.

Cellphone sales are set to dive this year, affected by consumers' reluctance to spend on new gadgets in the midst of the economic recession and large inventories built up by phone sellers at the end of last year.

Nokia, which plans to slash annual costs at its key handset unit by more than 700 million euros ($905 million), said it would continue to seek savings in operational expenses, looking at all areas and activities.

At the Salo plant, a cornerstone of the company's rise to become the world's top mobile phone maker in 1998, it will temporarily lay off the whole staff of 2,500 on a rotational basis, with between 20 percent and 30 percent of staff idle at a time.

With these plans, we aim to scale down Salo production to reflect reduced market demand, while operations in the factory continue uninterrupted, Juha Putkiranta, a senior official at Nokia, said in a statement.

The Salo plant -- the last major handset factory in Western Europe after Nokia closed its Bochum, Germany site last year -- has traditionally focused on making more advanced phone models.

Analysts and the industry in general expect the smartphone market -- where Nokia has lost market share to Apple and Research in Motion -- to grow some 10 percent to 20 percent this year, despite a fall in the overall market.

However, Nomura forecast on February 10 for no growth in smartphone market in 2009, saying industry growth views were unrealistic in the economic environment.

I find that the industry view that there will be good growth in smartphones in 2009 to be fundamentally flawed, Nomura technology specialist Richard Windsor said in a note.

I fear that come the end of June, we will be staring down the barrel of further cuts to estimates for smartphones.

Nokia also said it would close a research site employing 320 people in the Finnish town of Jyvaskyla. It said it will also look to cut 90 jobs elsewhere.

Analysts expect handset market volumes to fall some 18 percent in the January-March quarter, while Nokia is expected to report its weakest quarterly earnings in more than seven years, a Reuters poll showed on Wednesday.

On average, Nokia's earnings per share is expected to fall to 0.08 euros, the weakest level since the third quarter of 2001, when all vendors sold a total of 94 million phones -- less than Nokia is set to sell alone this quarter.

Turnover at Nokia's key phone unit is expected to slump 31 percent, hurting group profits, with underlying operating profit seen plunging 65 percent from a year ago.