Jan. 17 (Bloomberg) -- Shares of Intel Corp., the world's largest computer-chip maker, fell on concern a fight for market share with Advanced Micro Devices Inc. will hurt profit in 2007.

Intel shares dropped 5.7 percent, the biggest decline in six months, after the company yesterday forecast its gross margin will narrow to about 50 percent this year, missing analysts' estimates and extending a slide started in 2006.

Chief Executive Officer Paul Otellini renewed his promise to win back market share from Advanced Micro, Intel's only rival in personal-computer processors. Intel reported a 39 percent drop in profit for the fourth quarter as the company took on its smaller competitor by cutting prices and releasing new products.

``AMD is providing intense competition,'' said Michael Cuggino, chief executive officer of San Francisco-based Permanent Portfolio Funds, which manages about $850 million, including Intel shares. ``The price war is minimizing the margin considerably.''

Intel said yesterday that fourth-quarter net income fell to $1.5 billion, or 26 cents a share, from $2.45 billion, or 40 cents, a year earlier. Sales at the Santa Clara, California- based company declined 5 percent to $9.7 billion.

The shares declined $1.26 to $21.04 at 4 p.m. New York time in Nasdaq Stock Market trading. Before today, the stock had gained 10 percent this year on expectations the company making is headway against its smaller rival.

``2006 was a challenging year,'' Otellini, 56, said on a conference call. ``I continue to believe that Intel's shareholders are best served by using its capacity to retake market share.''

Margins Shrink

Competition with Advanced Micro has prompted Intel to ratchet down prices and speed up new product introductions, slicing margins from an average 58 percent in 2003 through 2005 to 51.5 percent in 2006.

Gross margin, the share of sales left after manufacturing costs, narrowed to 49.6 percent in the fourth quarter from 61.8 percent a year earlier.

``You need to invest more'' when new products are being developed and ``this is impacting the gross profit margin,'' Christian Morales, the head of Intel's Europe, Middle East and Africa business, said in an interview.

The fourth-quarter margin disappointed some analysts, including Sumit Dhanda of Banc of America Securities, who projected as much as 52 percent. Greg Barlage, who helps manage $35 billion at Boston-based Baring Asset Management, including Intel shares, was estimating about 51.5 percent for 2007.

Hole in the Bucket

Credit Suisse analyst Michael Masdea, in a report titled ``A Hole in Intel's Bucket,'' said the margins likely won't improve as Intel offers ``more silicon for the same price.'' Masdea, based in San Francisco, has an ``underperform'' rating on the stock.

J.P. Morgan's Christopher Danely, based in San Francisco, said Intel may not meet its first-quarter forecast because PC buyers may have overstocked and ``business conditions are worsening.'' He rates the shares ``neutral.''

Intel's profit, excluding some items, was 25 cents a share, in line with analysts' estimates. The company, whose results are viewed as an indicator of demand for computers and related components, kicks off quarterly earnings announcements for the technology industry along with Apple Inc. today and International Business Machines Corp. tomorrow.

Sales Forecast

Advanced Micro said last week that lower prices cut fourth- quarter profit and sales. The Sunnyvale, California-based company cited preliminary figures.

Intel forecast sales of $8.7 billion to $9.3 billion this quarter, compared with an average analyst estimate of $8.9 billion in a Bloomberg survey. Sales typically fall in the first three months of the year from the previous quarter as computer makers cut back orders after the holiday shopping season.

Otellini accelerated the release of new microprocessors to counter gains by Advanced Micro. At the same time, Intel slowed production to reduce inventory of older chips. The moves cut the stockpile by 4 percent to $4.3 billion from the third quarter and reduced gross margin by 2 percentage points.

The market for microprocessors shrank to $33.4 billion last year from $35 billion in 2005, even as chipmakers sold 10 percent more units, according to Scottsdale, Arizona-based IC Insights. The average selling price fell more than $10 to $90.27 per chip and probably will decline to $83.05 this year, the market researcher forecasts.

Intel ended the quarter with 94,100 employees, down from a peak of 102,500 at the end of the second quarter. Costs associated with job cuts decreased earnings per share by about 1.5 cents in the fourth quarter, the statement said. The sale of a communications-chip unit added 2.5 cents.

To contact the reporter on this story: Ian King in San Francisco at ianking@bloomberg.net

Last Updated: January 17, 2007 16:24 EST