UPDATE 1-Asian chip shares slide, heavy sell-off hits Hynix

(Adds brokerage reports, updates shares)

SEOUL, Nov 20 (Reuters) - Shares in key Asian memory chip makers fell on Thursday, with Hynix (000660.KS) dropping 13 percent, as growing signs the market slump could be prolonged prompted investors to sell holdings in the sector.

Consumer demand for memory-hungry electronics, from computers to digital cameras, is drying up quickly amid the financial crisis and the prospect of a lingering economic downturn.

The industry had long been counting on weaker players to exit the market, but speculation that smaller makers in Taiwan could receive government support to stay afloat accelerated worries about the sector's continuing distress.

News that Infineon's (IFXGn.DE) loss-making memory chip unit Qimonda QI.N is in talks with Germany's state of Saxony about a possible rescue plan added to the woes.

Hynix Semiconductor Inc, No. 2 maker of dynamic random access memory (DRAM) chips used mainly in personal computers, has lost a third of its value so far this week, hit by heavy selling from foreign institutional investors.

UBS initiated coverage on Hynix with a "sell" rating and said Hynix's operating outlook would worsen in 2009.

"The memory industry recovery has been pushed out to 2010. We expect the path to recovery to be a long and difficult one," UBS said in a report dated Thursday.

At 0256 GMT, Hynix tumbled 12.7 percent, compared with the Seoul stock market's 4.2 percent loss. Samsung Electronics Co Ltd (005930.KS), No. 1 in both DRAM and NAND flash memory chips, declined 2.2 percent.

Japan's Elpida Memory Inc (6665.T) extended losses after ending the previous session down 13.4 percent, falling 4.9 percent. Flash memory maker Toshiba Corp (6502.T) also shed 3.4 percent.

Taiwan's top DRAM makers, Powerchip (5346.TWO) and Nanya Technology (2408.TW), fell 6.9 percent and 6.5 percent, respectively.

Analysts said investors were further disappointed by major chipmakers' apparent inability to respond to the crisis by drastically cutting production and restoring balance in the market.

"Suppliers need a complete strategy change," said James Song, an analyst at Daewoo Securities. "The much-talked about bottom in the first quarter will never come unless makers try to achieve it."

Samsung forecast in October that global DRAM shipment growth would be at a mid-40 percent range in 2009. Even though analysts say the forecast is too optimistic, Samsung plans to increase its own shipments by an upper 60-percent range.

"What's needed is a supply cut of a scale that would meet the collapse in demand," said Hyundai Securities analyst Jay Kim. "It all depends on how quickly makers can give up their illusions about demand."

On Wednesday, U.S. research firm iSuppli cut its forecast for 2008 global semiconductor revenue and singled out the memory chip industry as the biggest sufferer. [ID:nSEO354566] (Reporting by Rhee So-eui, editing by Marie-France Han and Ken Wills)