U.S. chipmaker Intel is to buy German chipmaker Infineon's wireless unit for $1.4 billion (905.3 million pounds) as it seeks to claw its way into the booming smartphone market, reducing its reliance on personal computers.

The move, agreed on Monday, is the second major deal for Intel within two weeks. The company announced its $7.7 billion offer for McAfee Inc on August 19, its largest acquisition, bolstering the appeal of its chips as it tries to expand further into the mobile market.

Infineon fills a strategic gap, said Anand Chandrasekher, general manager of Intel's Ultra Mobility Group.

As multiple devices proliferate around the planet, we cannot depend on one technology alone, he added.

Intel dominates the market for PC microprocessors. Its Atom mobile chips took the low-cost, no-frills netbook market by storm but are rarely found in smartphones.

Intel, which sold its chip business for mobile handhelds and cell phones to Marvell Technology for $600 million four years ago, faces pressure as Apple's iPad and other tablet computers chip away at demand for notebooks and PCs.

And while a shaky economic recovery may make families think twice about upgrading their computers, experts say future growth in the microchip industry lies in smartphones and tablets, areas that Intel is far from dominating.

STANDALONE UNIT

Intel plans to keep Infineon's mobile unit independent once the cash-transaction closes in the first quarter of 2011.

We have learned from our experience over the past 20 years that many of our previous acquisitions have not been as successful as we would have liked them to be, that's why we are keeping this entity independent, said Arvind Sodhani, executive vice president of Intel.

UBS analyst Maynard Um said: Intel's acquisition of (the unit of) Infineon creates a well-funded industry competitor looking to compete and invest in the roadmap over the longer term.

Chandrasekher declined to say how much Intel had earmarked to invest in the business, saying only Intel planned to eventually become market leader in the mobile chip segment.

Meanwhile, rivals based on UK-listed ARM's chip design -- which is said to be more power-efficient than Intel's offerings -- continue to grab market share.

Infineon shares fell 3.8 percent to 4.434 euros by 1509 GMT in Frankfurt, widening losses to Friday's close after Intel warned its third-quarter revenue would fall short of its own expectations due to weak consumer demand on personal computers.

Investors had hoped for a higher price and additionally we expect profit-taking on the long-expected deal, analysts at Alpha brokerage wrote.

Three people familiar with the matter had told Reuters on Friday that Intel and Infineon would likely reach an agreement on the business's future within the next few days.

Intel shares were down 1.2 percent at $18.16. At least three brokerages cut their price targets on Intel's stock on Monday, bracing for a weak quarterly performance from the semiconductor bellwether.

SPECIAL DIVIDEND FOR INFINEON?

The deal will allow Infineon to focus on its core segments -- automotive, industrial and chip card security.

We didn't have to sell wireless but there is one thing I have learned over the past 15 years, at the end of the day in technology portfolio size matters if you want to maintain leadership position, said Chief Executive Peter Bauer.

Bauer, who took the helm in mid-2008, turned around the mobile chip unit after years of losses. It now generates around 30 percent of Infineon's total revenue but it ranks No. 5 in the chipset industry, far behind sector giants Qualcomm, Texas Instruments and Broadcom.

Infineon, based in Neubiberg near Munich, supplies chips to companies such as Nokia, LG and Apple.

Asset sales may also open the door for a special dividend for Infineon shareholders, who have not seen a payout in years.

Bauer said he could not comment on a dividend.

The deal comes amid a flurry of global M&A activity as companies struggle to boost revenue in a weak economy.

According to Thomson Reuters data, nearly $200 billion in mergers and acquisitions has been announced in August, already making it the third-best month so far this year in terms of money committed to deals.

(Additional reporting by Noel Randewich in San Francisco, Manasi Phadke in Bangalore and Sinead Carew in New York)

($1=.7861 euros)

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