Electronic readers could be the hottest gift this holiday season as a new crop of portable media devices begins to join iPods and other music players as must-have tech accessories.

The number of readers bought will be closely watched by industry analysts in advance of the expected emergence of multimedia tablet PCs, which Apple and others are thought to be working on and which could alter the competitive landscape.

Falling prices and an ever-growing library of digital books are driving demand for e-readers like Amazon.com's Kindle and Sony Corp's Reader.

The light, thin devices now mainly appeal to book lovers, but many see them as the first iteration of a go-everywhere gadget that consumers will use to watch movies and surf the Web, as much as scan books and newspapers.

ISuppli expects global sales of e-readers to top 5 million this year from about 1 million last year. It remains to be seen whether the current crop of readers morph into something with richer features, or tablets swoop in to define the market.

There is tremendous potential for these devices to become more multi-function, said Sarah Rotman Epps, an analyst with Forrester Research.

Holiday shoppers will be able to buy e-readers in stores owned by Wal-Mart and Best Buy. In May, Forrester predicted 2 million e-readers would be sold in the U.S. this year, but the research group now expects sales to far exceed that forecast.

However, the market is still small. Around 225 million portable music players are expected to ship this year, according to research firm In-Stat.

More consumers read books on their iPhones and iPod Touches than own Kindles and Sony Readers put together, noted Forrester's Rotman Epps.

But e-readers are growing in popularity. A study by Retrevo, a website specializing in consumer electronics, found they beat the perennial favorite, MP3 players, on the holiday wish list this year, with 20 percent of respondents planning to buy an e-reader.

Amazon's Kindle is the dominant device, with an estimated 60 percent U.S. market share. The Kindle 2 retails at $299 and costs about $186 to make, according to iSuppli, giving Amazon a nice margin.

But the market is getting increasingly crowded. Sony, which pioneered e-reading devices but was eclipsed by Amazon, has been adding new models, including one for $199. Both will see competition from iRex Technologies, to be sold through Best Buy. Taiwan's Asustek, pioneer of netbook PCS, is also reportedly launching a reader, perhaps this year.

TABLETS

The wildcard of tablet-style computers is looming on the horizon, analysts say, with the potential to disrupt a market that is far from settled. They are essentially laptops with touchscreens that can be swiveled to lie flat.

Much of the buzz about tablets has been generated by Apple, even though it has said nothing publicly about moving into a category that has seen its share of failures. Last week, reports emerged about a Microsoft Corp tablet called Courier, said to be in late-prototype stage.

Tablets offer the promise of Web browsing, video, music, and e-books -- but battery life has been a major obstacle.

The next batch is expected to break new ground. Archos, a French company, has unveiled a keyboard-less, touchscreen 9-inch tablet, and Toshiba has showed off the 7-inch Journe Touch, which can play high-definition video.

For now, analysts say e-readers continue to appeal to a particular slice of the market by offering an experience that many find equal or even better than reading a real book. They have long-lasting batteries and mimic the appearance of the printed page, easing eyestrain.

There's a lot that could be done with e-reading devices down the line. The technology will continue to mature, refresh rates will improve, and we'll eventually see color in these devices, said NPD analyst Ross Rubin.

(Reporting by Gabriel Madway; Editing by Edwin Chan, Bernard Orr)

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