Nokia reported a sharp drop in second-quarter profits and forecast a weak third quarter, increasing the pressure on embattled Chief Executive Olli-Pekka Kallasvuo.

The firm, which makes every third mobile phone sold in the world, has been rocked by two profit warnings and a management shakeup in the second quarter alone as it struggles to keep pace with smartphone rivals Apple and Google.

The Finnish company has lacked a hit smartphone model since its 2006 launch of the N95, and has lost out in the top end of the market to Apple's iPhone.

Now Nokia is looking for replacement for Kallasvuo, who has spent more than half of this life at the company, sources told Reuters earlier this week. Kallasvuo may be ousted as soon as this month, the Wall Street Journal reported.

A Nokia spokeswoman declined to comment after the result on whether Kallasvuo still enjoys board support.

Kallasvuo, a 57-year old former company lawyer and chief financial officer who married a veteran Nokia attorney, told CNBC television that talk of his exit was hurting the company and had to stop. [nWLA9017]

There has been a lot of speculation on my position, on myself, during the last couple of weeks and that is not good for Nokia and must be brought to an end one way or another, a frustrated Kallasvuo said.

The topic of management change is more important for the share price than results at the moment, said WestLB analyst Thomas Langer.

Shares in Nokia were up 3.3 percent at 7.22 euros by 1319 GMT, helped by wider recovery in the technology sector, with the Stoxx 600 European technology index up 1.5 percent.

Analysts said investor sentiment toward Nokia stock had improved somewhat since the stock hit a 12-year low in June.

Markets are starting to increasingly believe in the value call. The bottom has been reached, said Swedbank's Jari Honko.

Nokia shares trade at 10 times expected 2011 earnings per share, according to Thomson Reuters data, a steep discount to the average of its major global peers.

Its dividend of 0.40 euros for the last fiscal year also means it offers a 5.5 percent dividend yield -- a rarity in the technology sector, where many peers pay out nothing at all.

Nokia shares have dropped around 20 percent this year, strongly lagging the technology index, which is up 7 percent.

HIGH-END CHALLENGE CONTINUES

Nokia's underlying second-quarter earnings per share fell 27 percent from a year ago to 0.11 euros, in line with market expectations.

Nokia had warned on June 16 that phone sales and profits in the quarter would be weaker than earlier forecast, with the Finnish firm forced to slash prices to battle against Apple's iPhone and smartphones using Google's software.

Kallasvuo, called just OPK in the company, said Nokia believes the Nokia N8, its first phone using new Symbian software, will have a user experience superior to that of any smartphone Nokia has created.

OPK is saying that N8 is going to deliver the best user experience that you've ever seen on Symbian. Well, that's great, but what about the best experience versus your competitors? That's what matters and we just don't think that it's going to be enough, said Gartner analyst Carolina Milanesi.

Nokia said the underlying operating margin at its key cellphone unit dropped to 9.5 percent in the second quarter despite massive cost cuts and warned it could fall further in the third quarter.

The company has cut thousands of jobs and aims to slash annual costs at the phone unit by 1 billion euros this year.

What is slightly concerning is the Q3 margin guidance ... Now it all becomes about the fourth quarter. The competition is getting stronger, said Kulbinder Garcha at Credit Suisse.

The N8, expected to reach the market by the end of this quarter, will face stiff rivalry in the holiday-sales-fueled fourth quarter from the new iPhone and Google-phones from Samsung and Sony Ericsson.

Helped by a wide array of simple models, Nokia has been able to stop the slide of its overall smartphone market share, but

has lost ground among the pricier phones with fatter margins.

(Reporting by Tarmo Virki and Terhi Kinnunen, Georgina Prodhan and Ian Smith in London and Stockholm newsroom; Editing by Michael Shields)

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