Nintendo President Satoru Iwata dismissed the idea that the age of the dedicated handheld games device was over and said he aimed to return the company to substantial profit in 2012/13, after it warned of its first ever operating loss this year.

Shares in Kyoto-based Nintendo Co Ltd tumbled nearly 8 percent to an 8-year low after it slashed its full-year guidance for the third time in 6 months, and analysts said the potential market for its products was shrinking rapidly.

The creator of the Super Mario franchise reported a sharp drop in quarterly earnings, as its sales of its games devices that have dominated the industry for years were hit by competing gadgets such as Apple Inc's iPhone.

Iwata said he blamed the dismal results on a mixture of strategic errors and the difficult business environment created by the strong yen and European consumer gloom.

Nintendo is facing its worst results since it entered the games business. What matters now is how Nintendo can make a profit from next year onwards, even under these harsh conditions, he told an analysts' meeting.

The maker of the Wii home console and DS handheld games is struggling to compete as sales of more versatile smartphones and tablets boom, and poor sales forced it to slash the price of its much anticipated 3DS handheld game device in August.

The profitability of 3DS hardware was the biggest issue for earnings this financial year, but it looks like we'll be able to resolve the problem we've been having with losses on the 3DS during the first half of the next financial year, Iwata said.

We should be able to generate a large profit by getting rid of losses on the 3DS hardware, if we can substantially lift sales of software.

A Nintendo spokesman said the company expected to stop losing money on each 3DS sold, thanks to economies of scale and changes to the internal design of the device.

But Nintendo shares closed down 4.1 percent at 10,310 yen, after falling to 9,910 yen shortly after the market opened, their lowest since February 2004. It has lost nearly 60 percent of its value since the start of last year.

The company's core handheld business is under assault from smartphones, iPods and tablets, and we see competition for consumer wallet share continuing, said analyst Michael Pachter of U.S.-based Wedbush Securities in a research note.

The fact is that a significant share of Nintendo's market is gone forever, and we don't expect the company to come up with a practical strategy to stem the declines in sales we have forecast, he added. We do not expect the company's fortunes to turn in FY 13.

NEW HOME CONSOLE BY CHRISTMAS

Nintendo said on Thursday its third-quarter operating profit fell 61 percent to 40.9 billion yen ($529 million) and it forecast an operating loss of 45 billion yen for the financial year to March 31, far worse than analysts' average forecast of a 4.2 billion yen loss.

Sales of its 3DS slumped shortly after launch in February, forcing the company to slash prices just six months later and take a loss on each device, something it had prided itself on avoiding in the past.

Even so, Nintendo cut its full-year 3DS sales forecast to 14 million from 16 million, while sales of its ageing Wii and the previous generation DS have fallen faster than expected.

It also faces stiff competition in the home console market from Sony Corp's Move and Microsoft Corp's Kinect, and some analysts say the console market may dry up over the next several years as cloud gaming takes off.

Nintendo will launch its Wii U console, a successor to the phenomenally successful Wii, in Japan, the United States, Australia and Europe at the year-end, after showing a final version at the E3 games show in June.

But Masayuki Otani, chief market analyst at Securities Japan, said the market was unlikely to have high hopes for the Wii U, although the slide in the share price may be reaching an end.

The pace of the share price decline is easing and it may be near a floor, but it would be hard to predict a rapid recovery, he said.

Iwata said a leap in 3DS sales after the launch of a raft of software late last year showed that dedicated handheld games gadgets still had a future.

I believe we have disproved the extreme theory that there is no longer a demand for handheld devices, he said.

($1 = 77.34)

(Additional reporting by Dominic Lau, James Topham, Reiji Murai, Daiki Iga; Editing by Edwina Gibbs, Michael Watson and Alex Richardson)

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