* Strong yen, weak sales hit profit
* To launch Wii U console in major markets at year-end
* Cuts unit sales forecasts for consoles, handheld devices
* Slashes FY fcast to 45 bln yen loss vs consensus 4.2 bln yen loss
By Yoshiyuki Osada and Isabel Reynolds
Jan 26 (Reuters) - Nintendo Co Ltd posted a sharp drop in quarterly profit and forecast a bigger-than-expected full-year loss, its first at an operating level, as it battles a strong yen and its games devices lose ground to gadgets such as Apple's iPhone.
The creator of the Super Mario franchise dominated the video games industry for years with its DS handheld players and Wii home consoles, but is now struggling to keep up as more versatile smartphone and tablet sales boom.
"To say that (the days of consoles) are over is likely an overstatement, but social network and Internet delivered games are growing and structurally changing the future of the industry, which is a strong wind against Nintendo," said Shigeo Sugawara, senior investment manager at Sompo Japan Nipponkoa Asset Management.
Nintendo now expects an annual operating loss of 45 billion yen ($575 million), dwarfing expectations of a 4.2 billion yen loss, based on the average of 21 analyst forecasts.
"Their time of growth (from consoles) is over, and, while I don't think the company will cease to exist, if they don't move into new categories, they will no doubt lose the great scale they've amassed," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management in Tokyo. `
Nintendo cut its forecast for annual sales of its ageing Wii console to 10 million devices from 12 million, and for the 3DS handheld games device to 14 million from 16 million.
"We had higher expectations for the year-end season, but failed to meet them," President Satoru Iwata told reporters in Osaka.
Poor sales forced Nintendo to slash the price of its much-anticipated 3DS handheld games device in August, just six months after its launch.
The move halted its record of making profits on games hardware as well as software, a business model that took operating income to a high of 555 billion yen in 2008/09.
Nintendo also faces tougher competition in the home console market from Sony Corp's Move and Microsoft Corp's Kinect, and Iwata said consumers were more eager than ever to seek out bargains in the harsh economic environment.
The company plans to launch the Wii's successor, the Wii U, in Japan, the United States, Europe and Australia in the year-end season, Iwata told reporters.
But with cloud-based gaming emerging as a potential threat, Nintendo may have trouble generating excitement about its new product, some analysts say. Google is taking steps into gaming with Google TV, while Apple is thought to be preparing a new iPad and possibly a smart TV that could be game-changers for the industry.
"We think we need to consider the possibility that home consoles could become a thing of the past," Citigroup analyst Soichiro Fukuda wrote in a recent report.
"We think the direction taken by marketing trendsetter Apple will be very important and we will be watching the company's announcements at future events with interest."
Nintendo's profit slumped to 40.9 billion yen for the traditionally strong October-December period, compared with a consensus estimate for 52 billion yen, based on a survey of three analysts by Thomson Reuters I/B/E/S.
The results came a day after Apple blew away Wall Street's expectations with its own quarterly earnings.
Shares in Nintendo have halved to below 11,000 yen since the beginning of the financial year in April, hit by weak 3DS sales and market disappointment with the Wii U next-generation home console, unveiled at the E3 games show in June and set to go on sale late this year. At their peak, in late 2007, the shares traded at 73,200 yen.
Last week, the stock dipped to 10,020 yen, the lowest since April 2004, before either the DS or Wii were launched.