* Cancels plans to sell Kin phones in Europe this Fall
* Kin staffers to be combined with Windows Phone 7 team (Adds analyst comments, background, byline)
SAN FRANCISCO, June 30 (Reuters) - Microsoft Corphas pulled the plug on a new generation of smartphones less than three months after unveiling the devices that were part of its efforts to catch-up with Apple Inc and Google Inc in the fast-growing mobile market.
Microsoft said on Wednesday it had canceled plans to sell its "Kin" phones in Europe this Fall. The company added the internal team working on the Kin phones would be combined with the group working on Microsoft's forthcoming Windows Phone 7 software.
"We will continue to work with Verizon in the U.S. to sell current Kin phones," Microsoft said in an emailed statement.
The move underscores the challenges facing Microsoft, whose software is used on the vast majority of the world's PCs, as it strives to adapt to consumers' growing taste for handheld Internet-connected gadgets like smartphones.
In April, Microsoft said it was shelving an internal project to develop a tablet PC similar to Apple's iPad.
Last month, Microsoft reorganized its mobile phone and video game division, announcing that longtime Microsoft executive Robbie Bach would retire and that the senior vice presidents in charge of phones and games would report directly to Chief Executive Steve Ballmer.
Ballmer is "looking at the (mobile) business, seeing what's making money, what makes sense to do going forward," said Matt Rosoff, an analyst with Directions on Microsoft.
The Kin phones represented software giant Microsoft's first foray into designing its own phones. The two Kin models featured built-in Internet social networking functionality as well as Microsoft's Zune digital music player and were aimed at savvy young phone users.
Microsoft began selling the Kin phones with Verizon Wireless in May. Verizon Wireless, the largest U.S. wireless operator, is a joint venture of Verizon Communicationsand Vodafone Group Plc .
But Rosoff said the phones lacked certain key smartphone functions, such as the ability to install software applications, yet had wireless data service plans that were priced comparably to more full-featured devices like Apple's iPhone.
The Kin was also based on a special Microsoft software called Windows Phone OS, even as Microsoft prepared to release the new Windows Phone 7 mobile operating system. Smartphones running Windows Phone 7 are expected to be available this holiday season.
"Windows Phone 7 is the real mobile strategy," said Rosoff. "The fact that it (the Kin) was ever released in the first place was a mistake. When they went with Phone 7, they should have quietly killed this project."
Verizon Wireless spokeswoman Brenda Raney said that the Kin remains an important part of the company's "portfolio."
The smartphone market is exploding. According to research group Gartner, global sales rose nearly 50 percent in the first quarter.
Microsoft had a 6.8 percent share of the global market for smartphone operating systems in the first quarter of 2010, according to Gartner. Google's Android had 9.6 percent, Apple's iPhone had 15.4 percent, while Blackberry-maker Research in Motion had a 15.4 percent share and Nokia's Symbian software had a 44.3 percent share.
RBC Capital Markets analyst Robert Breza said that the battle to win the smartphone market is still in its early stages.
"With their vast amount of resources, I would never want to count out Microsoft," he said. "They can acquire their way into it. They can approach it in a different strategy."
Shares of Microsoft were up 61 cents, or 2.7 percent, at $23.62 in extended trading on Wednesday. (Reporting by Alexei Oreskovic with additional reporting by Sinead Carew; Editing by Sofina Mirza-Reid, Bernard Orr)
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