UPDATE 1-Sony to outsource image sensor output to Fujitsu-paper

* Aims to cut cost and boost competitiveness -paper

* Image sensors are used in digital cameras and mobile phones

* Sensor demand strong on brisk smartphone, camera sales

* Sony shares fall 1.5 pct, Fujitsu down 0.7 pct (Recasts, add details, comments)

TOKYO, Oct 1 (Reuters) - Japan's Sony Corp 6758.T will outsource some production of image sensors used in digital cameras and mobile phones to Fujitsu Ltd 6702.T to cut costs and cope with tough global competition, a newspaper said.

The deal with Fujitsu should allow Sony to meet growing demand for image sensors while keeping production costs in check and safeguarding its proprietary technologies in Japan, the Nikkei business daily reported.

A spokesman for Sony said the electronics giant has been considering outsourcing some image sensor production to meet strong demand driven by growing sales of advanced digital cameras and smartphones, but declined to comment further.

A Fujitsu spokesman declined to comment.

Sony Chief Executive Howard Stringer has made outsourcing production a key plank of his strategy to boost profit margins, which continue to be squeezed by harsh price competition despite a series of major restructurings since he took the helm in 2005.

Sony is the world's No.6 maker of CMOS (complementary metal-oxide semiconductor) sensors with an output capacity equivalent to 16,000 silicon wafers a month, according to the Nikkei. Bigger rivals include U.S.'s OmniVision Technologies OVTI.O and South Korea's Samsung Electronics 005930.KS.

Sony will begin subcontracting output to Fujitsu as early as the current business year to next March at a pace of several thousand silicon wafers a month and may expand more depending on the impact on its cost base, the Nikkei said.

The deal with Fujitsu will complement Sony’s own efforts to ramp up output. Sony announced last month that it would invest about 40 billion yen ($479 million) to beef up production of image sensors at its own facilities in Japan.

Shares in Sony fell 1.5 percent to 2,543 yen, against a 0.9 percent rise in the benchmark Nikkei average .N225. Fujitsu dropped 0.7 percent to 582 yen. (Reporting by Mariko Katsumura and Sachi Izumi; Editing by Edmund Klamann and Nathan Layne)