(Updates stock price, adds details from company and CEO comment)
By Abhirup Roy and Malathi Nayak
March 27 (Reuters) - Video game retailer GameStop Corp on Thursday forecast full-year earnings below market expectations as it is yet to see an uptick in sagging video game software sales, despite robust hardware sales driven by the launches of Microsoft's Xbox One and Sony's PlayStation 4 consoles.
GameStop shares fell as much as 9.3 percent, making the stock one of the top percentage losers on the New York Stock Exchange, before paring losses to close down 4.0 pct at $37.33.
The Grapevine, Texas-based company, which reported a weaker-than-expected fourth-quarter profit, had said in January that sales of games for older versions of Xbox and PlayStation consoles were weak.
"Investors came into this quarter with high expectations of how new-generation consoles would drive sales of hardware and software," Morningstar analyst Liang Feng, said.
"New software sales over the past few years have been turning downward. ... You're seeing some investors get jittery that maybe it's a structural trend that will continue."
In addition to uncertainty around sales of new games, GameStop's used-game business, historically its most profitable, will face new competition from retail giant Wal-Mart, which said last week it would allow U.S. shoppers to trade in used games for anything from groceries to gadgets. The used-game business involves refurbishing old games and selling them at a reduced rate.
GameStop forecast full-year earnings of $3.40-$3.70 per share and revenue growth of 8-14 percent or about $9.76 billion-$10.30 billion. Analysts are expecting earnings of $3.76 per share on revenue of $9.85 billion, according to Thomson Reuters I/B/E/S.
"We've got through a very tough transitional quarter," Chief Executive Officer Paul Raines said in an interview. "But we're very bullish on the (new)consoles."
GameStop's forecast reflects its expectations for strong sales of new video game hardware and a gradually improving software market making 2014 "another transition year", R.W. Baird analyst Colin Sebastian said in a note.
GameStop executives told investors in a conference call that a drop in software sales for older consoles had impacted its fourth-quarter results.
The company's net profit fell to $220.5 million, or $1.89 per share, in the fiscal fourth quarter ended Feb. 1, from $261.1 million, or $2.15 per share, a year earlier.
Revenue rose to $3.68 billion from $3.56 billion, helped mainly by demand for the new game consoles from Sony and Microsoft.
Excluding one-time items, GameStop earned $1.90 per share, missing the average analyst estimate of $1.92, on revenue of $3.79 billion.
GameStop shares, which traded at $25.30 a year ago, hit a 52-week high of $57.74 in mid-November when Sony and Microsoft released their new consoles.
The company said on Thursday that it has shut its Spawn Labs unit, which it acquired in 2011 to develop online game-streaming technology.
Raines said GameStop saw a low demand from gamers and decided to focus on its partnerships with companies like Sony that have their own services that stream games from cloud servers.
GameStop's sales largely depend on consoles made by Sony Corp, Microsoft Corp and Nintendo Co Ltd , which increasingly must compete with games available on tablets and smartphones.
Console gamers are also buying more games online through digital platforms on PCs and mobile devices.
GameStop has diversified its revenue stream in recent years by selling used games and hardware to console owners and expanding its digital and mobile offerings,including sale of iOS and Android devices in some stores.
Some analysts have said that GameStop would continue to be a dominant player despite the threat of increased competition.
"We're more watchful for how much of the old console market has moved onto the mobile and PC gaming platform and what's the trend in the console market itself as Xbox and PlayStation strengthen their digital market over time," Feng said. (Additional reporting by Lehar Maan in Bangalore; Editing by Ted Kerr, Stephen Powell and Leslie Adler)