Intel also said it was scaling back capital spending as a result of the business slowdown. Intel's stock was down 3.7 percent on Friday afternoon, and shares of ASML Holding NV and other companies that make chip-manufacturing equipment also lost ground.

A revision of Intel targets had been expected by some analysts after PC makers Hewlett Packard Co and Dell Inc warned of slow demand last month, a development that has been compounded by a shaky global economy and consumers shifting toward tablets and smartphones.

But the 8 percent reduction in the top chipmaker's revenue outlook was much more severe than expected. Intel also withdrew its full-year forecast.

The scaled-back outlook comes just days ahead of a major event where Intel will tout a new generation of processors that consume less power, central to its strategy of reinvigorating a stagnant PC industry.

Bernstein analyst Stacy Rasgon said the size of the Intel cut was surprising. Weakness in PC sales to businesses and governments, known as enterprise sales, cited by Intel also raised concerns.

"In the last six to eight quarters, consumers have been weak but the enterprise was strong. Now the enterprise is weak," Rasgon said.

WAITING FOR WINDOWS

Intel's warning comes at a time when PC makers should be gearing up to build more computers than usual ahead of the launch of Microsoft Corp's Windows Phone 8 operating system.

Intel has been banking on the Windows 8 release in October to help slow the trend of consumers buying smartphones and tablets instead of PCs.

Devices running Windows 8 and powered by Intel's latest components will be a major draw when thousands of technology professionals descend on the annual Intel Developer Forum in San Francisco next week.

While a Windows release normally boosts computer sales, analysts believe it might not help as much this time.

At the forum, Intel is expected to show off a range of Ultrabook laptops powered by recently launched Ivy Bridge processors, as well as hybrid devices with screens that detach from keyboards to be used as tablets.

Along with concerns about consumer demand being hurt by the weak economy, manufacturers are reluctant to commit their resources until they have a better idea of which kinds of new devices will become hits with consumers.

"You're trying to decide are people going to buy ... a tablet that slots into a keyboard, or are they going buy traditional notebooks or ultrabooks?" said MKM Partners analyst Daniel Berenbaum.

"In the absence of knowing what to sell, there's a clear reluctance to build any sort of further inventory."

POWER-EFFICIENT CHIPS

Intel's next-generation PC processor, code-named Haswell, will also be front-and-center at the forum, with executives talking up improved power performance that will let future laptops stay on longer without needing a recharge.

Haswell, due to appear in a crop of laptops released for next year's holiday season, will improve on computing and graphics features and is targeted to reduce electricity consumption from 17 watts to 10 watts, according to Intel.

Intel said it now expects third-quarter revenue of $13.2 billion, plus or minus $300 million, down from its previous forecast of $13.8 billion to $14.8 billion.

Analysts on average expected $14.2 billion. The company is due to report third-quarter results in October.

Intel processors are used in 80 percent of the world's PCs, but the Santa Clara, California, company has been slow to adapt chips for smartphones and tablets and now trails Qualcomm Inc and Samsung Electronics Co Ltd, which design their chips using power-efficient technology licensed from ARM Holdings Plc.

Intel's new Medfield processor, showcased in phones launched this year in Russia, India and the United Kingdom, surprised some critics who believed the chips would consume too much power.

Motorola Mobility, owned by Google Inc, is expected to unveil an Intel-based smartphone in London on September 18, the first of a multi-device agreement with the chipmaker.

"They have a respectable seat at the (mobile) table because they surprised a lot of people with Medfield and just how well that did perform," said Patrick Moorhead of Moor Insights & Strategy. "Their big chance to get more credibility will come with Motorola."

The company said on Friday that full-year capital spending is expected to fall short of its previous forecast of $12.1 billion to $12.9 billion.

It expects gross margin of 62 percent for the third quarter, plus or minus 1 percentage point, down from its previous expectation of 63 percent, plus or minus a couple of percentage points.

Intel shares were down 3.7 percent at $24.16 on Friday afternoon. AMD was off 4.9 percent at $3.48. PC graphics chipmaker Nvidia Corp was down 1.9 percent at $13.47.

ASML's Nasdaq-traded shares were down 1.7 percent at $56.88, and stock of chip gear maker Applied Materials Inc was down 0.7 percent at $11.83.

(Reporting by Sayantani Ghosh in Bangalore, Sinead Carew and Nicola Leske in New York; editing by Saumyadeb Chakrabarty, John Wallace and Matthew Lewis)

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