* LDK, SunPower forecast lower margins
* SunPower sees 20 pct solar module price drop this year
NEW YORK/LOS ANGELES, June 7 (Reuters) - Steep declines in prices for solar products will shrink profit margins for SunPower Corp SPWRA.O and LDK Solar Co Ltd LDK.N this year, the companies said on Tuesday.
Germany and Italy, the world's two largest solar markets, both have cut subsidies for the renewable energy source in recent months, though manufacturers have ramped up output of the modules that turn sunlight into electricity.
SunPower Chief Executive Tom Werner said the industry was seeing intense competition for sales that could drive prices for solar modules down 20 percent this year.
"You are seeing points where it's not economically viable for some (of our) competition to produce product," he told Reuters.
But China-based LDK, which mostly makes solar wafers but has been expanding into the module market, said module shipments would increase significantly in the coming months.
At the same time, however, LDK said second-quarter margins would be much lower than first-quarter levels as prices on solar products continue to slide [nN07155332].
While the lower prices for solar equipment help drive greater sales of the energy source that relies on subsidies to compete with fossil fuels, the weaker profit margins have driven down share prices of the solar makers.
"There was some commentary from both companies that suggests demand is improving in the near term, but given the supply that has come online we are still cautious on the pricing environment," said Needham & Co analyst Edwin Mok.
SunPower is shifting its business in Italy away from the large, utility scale solar plants and toward the residential and commercial rooftop markets, which earn a lower profit margin.
Italy accounted for about a third of San Jose, California-based SunPower's business last year.
LDK, meanwhile, has been expanding its production of cells, modules and the industry's raw material, polysilicon, so that it can reduce manufacturing costs and preserve margins.
SunPower expects to close later this month on a deal to sell French oil giant TOTAL SA (TOTF.PA) a 60 percent stake. The company cut its gross margins forecast for 2011 but raised its second-quarter revenue view and backed a prior full-year revenue outlook.[ID:nN07161490]
LDK reported a sharp increase in first-quarter earnings but forecast second-quarter revenue and margins below Wall Street estimates. Prices on LDK's main product, wafers, held up relatively well in the first quarter but have fallen dramatically in recent weeks.
On a conference call with analysts, LDK said it was still exploring a possible initial public offering of its polysilicon business.
LDK shares fell 2.1 percent to $6.95 in extended trade after closing at $7.10 on the New York Stock Exchange. SunPower shares closed at $20.95 on the Nasdaq. (Reporting by Nichola Groom; editing by Carol Bishopric)