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.