UPDATE 4-SAP saw sudden drop-off in software sales

(Updates stock prices and failed lawsuit settlement talks)

By Michael Shields and Jim Finkle

FRANKFURT/BOSTON, Oct 6 (Reuters) - German software maker SAP AG (SAPG.DE) warned that its sales had abruptly dropped off in the last two weeks of September as companies curtailed business software spending amid a widening financial crisis.

The announcement on Monday drove SAP shares down 16.4 percent, their biggest drop in nearly 12 years, and pulled down the whole technology sector as investors feared that other computer industry companies also faced a drop in business.

Shares of SAP rival Oracle Corp (ORCL.O) fell 6.1 percent, while the tech-heavy Nasdaq composite index .IXIC fell 4.3 percent.

Michael McCarty, chief equity and options strategist with broker dealer Meridian Equity Partners, said he expected results for the third quarter to be rough for many tech companies and that forecasts for the rest of the year would miss Wall Street estimates.

"You are going to hear more and more companies pulling back on expectations," McCarty said.

SAP, the world's biggest maker of software that large and mid-sized companies use to manage their businesses, blamed the financial industry crisis and economic uncertainty for causing its customers to put orders on hold.

"The market developments of the past several weeks have been dramatic and worrying to many businesses," said SAP Co-Chief Executive Henning Kagermann. "These concerns triggered a very sudden and unexpected drop in business activity at the end of the (third) quarter," he said.

That slowdown in sales affected other tech companies, including makers of software, computers and networking equipment, SAP said.

"The information we have received from customers is that the decisions that have been made at the later stage of this quarter have been broadly IT based," Co-CEO Leo Apotheker said in a press conference. "These things are correlated with hardware, with networking and with other types of software."

Among the large technology shares that fell on Monday were Microsoft Corp (MSFT.O), which dropped 5.4 percent, International Business Machines Corp (IBM.N), which fell 2.7 percent, and Cisco Systems Inc (CSCO.O), which declined 3.7 percent. EMC Corp (EMC.N) fell 7.3 percent.

The downbeat comments from SAP marked a dramatic reversal for a company that said in late July that it was well placed to withstand an economic downturn.

"They underestimated the problems their customers are facing," said Trip Chowdhry, an analyst with Global Equities Research. "Sometimes companies are totally clueless as to how their customers are suffering."

Chowdhry said he expected Oracle to miss forecasts that it issued last month for the quarter ended in November.

"They put up a bold face just to keep the morale of their customers. I won't be surprised to see if they come back and say 'Oops, things are worse. We have underestimated how bad things are,'" he said.

Oracle could not be reached for comment.

SAP, based in Walldorf, Germany, said preliminary data for the third-quarter ended Sept 30 show non-GAAP software and software-related service revenues of 2.01-2.02 billion euros ($2.73-2.75 billion), a gain of 20-21 percent at constant currency.

Apotheker said he was hopeful that sales would get back on track during the current quarter.

"This is still a short-term hold. Let's see how things evolve in the next couple of weeks," he said.

Following a strong second quarter, SAP said in late July it expected to reach the upper end of its full-year 2008 software and software-related service revenue growth range of 24-27 percent at constant currencies.

Kagermann said on Monday results for the first nine months of the year showed SAP was in the middle of that range. He said SAP had frozen hiring but was not cutting staff.

"The overall fundamentals of our business remain in place. SAP did report double-digit growth in software and software-related service revenues for the quarter and we expect to have gained further market share, even during unfavorable market conditions," Kagermann added.

The company plans to present full quarterly results and update its 2008 forecast on Oct. 28.

SAP's Frankfurt shares fell 16.4 percent to 28.84 euros. Its U.S. shares fell 12.3 percent to $40.04.

Separately, in a court filing, lawyers for Oracle and SAP said they had ended extended settlement talks without reaching a deal on the settlement of a lawsuit by Oracle that accuses SAP of using a now dismantled unit called TomorrowNow of stealing Oracle trade secrets in a bid to woo away customers. (Additional reporting by Eva Kuehnen in Frankfurt, Eric Auchard in San Francisco; editing by Brad Dorfman, Richard Chang)