Graphics chip designer Nvidia Corp said it will begin designing central processors for personal computers, pushing back against growing pressure from Intel Corp.

Nvidia shares rose 7.7 percent after the announcement and closed at $16.98 on the Nasdaq.

The company, which is developing the product under the code name Project Denver, said it obtained the rights to develop the central processor, or CPU, using ARM Holdings said it will introduce a version of its Windows operating system compatible with chips designed by ARM Holdings.

Microsoft has long built its Windows operating systems around Intel chips and its move toward ARM suggests a shift from its alliance with Intel.

If you have the ability to have your own processor architecture and the support of operating-system vendors like Microsoft, then that becomes a formidable dynamic that Intel will have to contend with, said Hans Mosesmann, an analyst at Raymond James.

You and I five years from now might look back at this ... and say this was the turning point in the industry, he said.

MOVE TO GRAPHICS

Nvidia's decision to build central processors comes as Intel attacks Nvidia's own graphics business.

Intel has just unveiled its lineup of chips that closely integrate graphics processing, which could reduce demand for Nvidia's lower-end graphics chips.

To diversify, Nvidia has already begun branching into smartphone and tablets, combining its graphics chips with ARM-based processors for mobile devices.

Nvidia said that LG Electronics Inc will use its Tegra 2 processor in its Optimus 2X phones. It said it would debut other smartphones at CES but could not provide details.

Energy efficient microchips based on ARM architecture and licensed to companies like Marvell and Qualcomm dominate the tablet and smartphone market.

Analysts warned that Nvidia's plan to build PC CPUs will be a gamble and would take years to pay off.

The questions we need to ask now is how quickly and what level of support these products will get from PC and handset original equipment manufacturers? said Gleacher & Company analyst Doug Freedman.

(Additional reporting by Liana B. Baker; Editing by Steve Orlofsky, Bernard Orr)

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