UPDATE 3-Recalls, weaker economy hurt US toy sales in 2007

(Adds detail on infant and preschool toy sales)

NEW YORK, Feb 12 (Reuters) - U.S. toy sales fell slightly in 2007 as the industry suffered from negative publicity surrounding the recall of millions of China-made playthings and a weakening economy, according to data released on Tuesday by market research firm NPD Group.

U.S. toy sales fell about 2 percent to $22.1 billion from $22.6 billion in 2006. The biggest declines were in dolls at 8 percent, while sales in the infant and preschool category and the outdoor and sports category each fell 5 percent.

Despite the decline, the infant and preschool category was still the top seller in 2007, NPD said.

The toy industry was already hard-pressed to duplicate a surprisingly strong 2006 and growing financial strains on consumers compounded the issue of children increasingly abandoning toys for electronics such as MP3 players, cell phones and video games, Needham & Co analyst Sean McGowan said.

"Although toy sales are typically more resilient in uncertain economic times than other categories, the reality is that consumers face a wide and growing number of challenges," he said.

Industry leader Mattel Inc (MAT.N) and rival Hasbro Inc (HAS.N) each saw some weakness in their domestic results, despite posting better-than-expected fourth-quarter profits.

Last month, Mattel, which recalled millions of toys last year due to safety concerns and lead paint, said its gross U.S. sales fell 3 percent.

Hasbro, the second-largest U.S. toy maker, said on Monday that operating profit at its North American segment fell 22 percent during the quarter.

NPD, meanwhile, said action figure sales rose 8 percent last year, boosted in large part by toys tied to the blockbuster films "Transformers" and "Spider-Man 3."

Walt Disney Co's (DIS.N) Hannah Montana, Hasbro's Spider- Man and Transformers, Webkinz, and Air Hogs were the toy properties with the greatest growth for the year, NPD said.

Licensed toys generated 27 percent of the industry's sales in 2007.

Online and Internet channel sales rose 9 percent in 2007, bringing its share of overall toy industry sales to 7 percent. (Reporting by Justin Grant; Editing by Andre Grenon)