(Adds Sony executive's comment, details, background)
TOKYO, Sept 2 (Reuters) - Sony Corp's (6758.T) game unit said on Tuesday it will launch a new model of its PlayStation Portable (PSP) handheld machine on Oct. 16 in Japan, its latest bid to challenge Nintendo Co Ltd's 7974.OS market-leading DS.
The PSP-3000, unveiled in August, comes with a built-in microphone and advanced liquid crystal display (LCD) panel that is better suited for use outdoors and offers a shorter response time than the existing machine.
A quicker response makes moving pictures look seamless and natural, while the process of making phone calls on the PSP becomes easier with the built-in microphone. The PSP already supports a Skype Web phone function.
"The LCD is the face of a PSP, and it is an important feature of the 3000 model," Sony Computer Entertainment Japan President Shawn Layden told a news conference in Japanese.
The new machine will sell for 19,800 yen ($182), the same price as the current PSP model and compared with 16,800 yen for the DS.
Sony sold 3.72 million units of the PSP in April-June worldwide, while Nintendo's DS sold 6.94 million units.
The PSP, however, has outsold the DS in recent months in Japan, helped by Capcom Co Ltd's (9697.T) popular hunting action game "Monster Hunter Freedom 2G".
In a move to spur holiday demand for the PSP, game software maker Square Enix Co Ltd (9684.T) plans to launch "Dissidia Final Fantasy", the latest version of its blockbuster "Final Fantasy" game series, for the Sony machine on Dec. 18.
Shares in Sony closed down 1.7 percent at 4,070 yen ahead of the announcement, while Nintendo fell 2.4 percent to 52,400 yen and the benchmark Nikkei average .N225 was down 1.8 percent. (Reporting by Kiyoshi Takenaka; Editing by Michael Watson)