By David Ibison

Nokia, the world’s largest mobile phone maker, warned on Friday that its market share would shrink in the third quarter of the year, ending a period of almost uninterrupted growth and wiping almost 10 per cent off its share price.

The Finnish company stood by its earlier forecast that industry-wide unit sales for the full year would increase but admitted for the first time that aggressive moves by its competitors were pricing it out of the market.

The warning shocked investors, who had come to believe that the industry juggernaut was immune to the global economic downturn.

Shares in Nokia closed down 9.6 per cent at €14.20 on Friday, its lowest level in almost three years.

The news also hit shares of Nokia’s leading suppliers. STMicroelectronics was down 5.5 per cent to €8.15 while Qualcomm shares were off about 0.8 per cent on the Nasdaq and Texas Instruments was down 1.8 per cent on NYSE.

Rick Simonson, Nokia’s chief financial officer, declined to predict how much the company’s market share would drop but said: “We are not talking about several points here”. The company sold four out of every 10 mobile phones globally at the end of the second quarter.

Mr Simonson told analysts that that profitability would be affected: “Less units equals lower revenues equals lower operating profit,” he said.

Nokia is not the first large mobile maker to report problems this year. Sony Ericsson, the world’s fifth-largest mobile manufacturer, has issued two profit warnings because fewer consumers are buying handsets than previously expected in its core European markets because of the economic downturn.

Nokia stressed that the decline in its market share was due to a decision not to participate in a price war for low-end phone sales being waged by competitors such as Samsung of South Korea.

“Nokia’s strategy is to take market share only when the company believes it to be sustainably profitable in the longer term. Nokia has not broadly participated in recent aggressive pricing activity as it believes that the negative impact to profitability would outweigh any short-term incremental benefits to device unit sales,” the group stated.

In spite of this commitment to profitability, the announcement has made clear for the first time that Nokia is not impervious to competitive pressures and the giant Finnish company can be undermined.

It raises doubts about the sustainability of Nokia’s business model of building market share, especially in large emerging markets, and increasing its profitability while being able to reduce the prices of its handsets.

Mr Simonson insisted that the prices being offered by its competitors were “not sustainable” and he was confident that there would be a recovery in the fourth quarter.

The company continued to expect an increase in its market share in mobile devices for the full year 2008.

However, it cautioned that this global market would be “impacted by weaker consumer confidence in multiple markets”, although industry mobile device volumes in 2008 should grow 10 per cent or more from the approximately 1.14bn units Nokia estimated for 2007.

When it released its second-quarter results in July, the company reported a 13 per cent year-on-year rise in earnings per share and increased its sales forecasts at the time. Net sales for the second quarter rose 4 per cent to €13.2bn ($20.9bn) while its operating margin rose from 11.1 per cent in the second quarter of 2007 to 14.7 per cent, even though the average price of its handsets fell to €74 from €79.

The results had added weight to Nokia’s long-stated claim that its scale and geographical scope allows it to increase market share, margins and earnings while average selling prices drop.