Nokia has found a software bug in its Lumia 900 smartphone, its answer to Apple's iPhone, and is effectively giving the model away until it is fixed, blunting its bid to turn around its fortunes in the United States.

Nokia's first 4G phone, which it markets with the strapline an amazingly fast way to connect, can occasionally lose its data connection as a result of the bug, Nokia said.

Though still the world's biggest volume maker of cellphones, Nokia lost the top spot in the lucrative smartphone market last year to Apple and Google, in part due to its weak performance in the United States, where its smartphones have slipped to less than a 1 percent market share.

The Lumia 900, which uses Microsoft's Windows Phone software, is currently only available in the United States and is key to its comeback there.

It's like they stalled their engine when everybody is looking at them at the start of their race, said Gartner analyst Carolina Milanesi.

It is the third Nokia phone to run the Windows operating system since it ditched its own Symbian system last year, and only went on sale in the United States through AT&T on April 8. It is due for a wider global launch this quarter. The model won several awards at the Consumer Electronics Show in Las Vegas when it was launched in January.

Nokia said a software update to fix the problem, which was a memory management issue related to phone software, not to hardware, the network or the Windows operating system, would be available around April 16.

It is offering anyone who has bought a Lumia 900 phone, or who buys one by April 21, a $100 credit to their AT&T bill. The operator sells the phone for $99.99 with a two-year contract.

COSTLY GLITCH

I must say I have not encountered anything, but I have been impressed by their forthright, aggressive, and undoubtedly costly response, said Boston-based analyst John Jackson from CCS Insight, who uses the Lumia 900.

Though one analyst who asked not to be named said it would only cost Nokia at most $10 million on likely sales in that period, it will be a big disappointment to a company struggling to revive its brand. Its share of the global smartphone market tumbled to 12 percent in the fourth quarter of last year from 30 percent a year earlier.

To have a memory issue causing disruption to what was otherwise, apparently, a fairly good launch, with prime time ads and reasonable reviews, is the last thing they needed - particularly in the U.S., said Tim Shepherd, analyst at Canalys.

Nokia's share price has dropped more than 50 percent since it unveiled the swap to Microsoft in February 2011 as sales of the Windows phones have yet to compensate for the decline in sales of its older models. Its shares were down 0.5 percent on Wednesday at 3.806 euros at 0948 GMT, while Europe's top shares were up about 0.6 percent.

Nokia created the smartphone industry in the late 1990s with its Communicator models and was the undisputed leader until Apple's iPhone entered the ring in 2007 and Google's Android system was released in late 2008. In late 2010 it replaced its chief executive with Stephen Elop, who headed Microsoft's business division, and later switched to the Microsoft Phone system to arrest the decline.

(Reporting by Tarmo Virki; Writing by Will Waterman)

Apple inc. Smartphone