UPDATE 1-Nikon cuts profit forecast on chip equipment, yen

*Cuts profit forecast by 40 pct on chip equipment, yen

*Lowers chip stepper sales target by 30 pct

*Rival ASML shares down 2 pct after announcement

*Nikon shares close up 13.8 pct before announcement (Updates with details, background)

TOKYO, Oct 30 (Reuters) - Japan's Nikon Corp 7731.T slashed its annual net profit forecast by 40 percent to below market expectations, citing weaker sales of semiconductor-making equipment and a stronger yen.

Shares of Netherlands-based ASML ASML.AS, Nikon's main rival in the chip equipment market, were down about 2 percent after the announcement.

Nikon cut its estimate for sales of new steppers in the current business year to March by 30 percent to 74 units, the latest victim of spending cuts by chipmakers adjusting their budgets as the global economy slows.

Steppers are multi-million dollar machines used in the production of semiconductors. Canon Inc 7751.T also competes in this market with Nikon and ASML.

Nikon said it now expects to post a net profit of 47 billion yen for the year, down from last year’s 75.5 billion yen and below a market consensus of 77.5 billion yen from a poll of 20 analysts by Reuters estimates.

It cut its sales forecast by 4 percent to 940 billion yen.

Nikon generates about three-quarters of its revenues outside the Japanese market, making its earnings vulnerable to the recent surge in the yen against the dollar, euro and other currencies.

Advantest Corp 6857.T has also been hurt by the chip market slump. The maker of semiconductor testing machines said on Thursday it swung to a net loss of 2.9 billion yen in the April-September first half. [ID:nT308OLZU4]

Nikon said digital camera sales remain strong.

It raised its annual target for shipments of digital single lens reflex cameras -- high-end models that use interchangeable lenses -- to 3.5 million units from 3.3 million, while lifting its compact camera forecast by 7 percent to 10 million units.

Nikon's rivals in the digital camera market include Canon, Sony Corp 6758.T and Panasonic 6752.T.

Prior to the announcement, shares of Nikon closed up 13.8 percent at 1,655 as part of a broad market rally. The stock has lost 57 percent so far this year, underperforming a 41 percent fall in the benchmark Nikkei average .N225. (Reporting by Nathan Layne; Editing by Edwina Gibbs)