UPDATE 2-Sharp cuts annual outlook on slow cellphone demand

(Adds announcement, fund manager comments)

OSAKA, Japan, Oct 6 (Reuters) - Japanese consumer electronics maker Sharp Corp (6753.T) cut its annual operating profit outlook by one-third on Monday due to sluggish domestic sales of mobile phones, missing market expectations by a wide margin.

Mobile phone demand in Japan slowed this year as wireless operators such as NTT DoCoMo Inc (9437.T) cut sales incentives paid to retailers to keep handset prices low.

Weaker cellphone sales hurt demand for its image sensor chips and small LCD panels that go into mobile phones.

Sharp makes core components for cellphones in-house. That strategy maximises profitability of its mobile phone operations when demand is strong, but it also makes the company vulnerable to any downturn in the market. Sharp competes with Panasonic Corp (6752.T) and Fujitsu Ltd (6702.T) in Japan's mobile phone industry.

The Osaka-based company now expects its operating profit to total 130 billion yen ($1.25 billion) in the year to March 2009, down from its previous forecast of 195 billion yen.

The latest projection compares with a consensus of a 170.1 billion yen profit in a poll of 19 analysts by Reuters Estimates.

Sharp's earnings were also hit by sliding LCD panel prices. It sells LCD panels to other flat TV makers as well as assembling them into its own TV sets.

"Demand for LCD TVs is set to grow further as we go forward. But it is without question that the current economic conditions will cool consumer sentiment temporarily," Sharp Executive Vice President Toshishige Hamano told a news conference.

Sharp shared third place in the global LCD TV market with LG Electronics Inc (066570.KS) in the first half of 2008, trailing Samsung Electronics Co Ltd (005930.KS) and Sony Corp (6758.T), according to research firm DisplaySearch.

"I see no surprise in the revision. With a slowing economy and adverse business environment, revisions like this seem quite natural," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management.

Downward revisions are likely to spread to other Japanese electronics makers, Akino said.

Analysts on average expect Sony to post an operating profit of 424.9 billion yen in the year to next March, well short of the electronics and entertainment conglomerate's own forecast in July of 470 billion yen.

Shares in Sharp closed down 5.4 percent at 1,003 yen ahead of the announcement, underperforming the Tokyo stock market's electrical machinery index .IELEC.T, which fell 4.9 percent. ($1=104.12 Yen) (Reporting by Yumi Horie and Kiyoshi Takenaka; Editing by Michael Watson)