By Sachi Izumi and Rhee So-eui

Japan's Sony <6758.T>, maker of Bravia flat TVs, Cyber-shot digital cameras and PlayStation game machines, said it would post a bigger-than-expected $2.9 billion operating loss this business year due to sliding demand, a stronger yen and as it restructures its ailing electronics operations.

Consumer demand for gadgets has slumped as the financial crisis has grown into a broad recession that has already engulfed the United States, much of Europe and dampened demand in once-resilient emerging markets.

As inventories pile up and prices tumble, Sony is feeling the pinch across its operations -- from semiconductors to movies and insurance. Analysts say the group, which generates two-thirds of its revenue outside Japan, needs to take more drastic steps.

"Sony has to consider ways to lower fixed costs not only for its TV business but for the whole company," said Nomura Securities senior analyst Eiichi Katayama. "It will have to start cutting development costs in addition to production costs."

Sony's grim warning came as Japanese exports plunged by a record amount in December and China's economy slowed sharply in the fourth quarter as recession in rich nations hammered the demand that helps drive Asia's top two economies.

Sony competes with Samsung Electronics <005930.KS> in TVs, Canon Inc <7751.T> in cameras, and Microsoft Corp and Nintendo <7974.OS> in video games.

Adding to the gloom, South Korean mobile phone and appliance maker LG Electronics <066570.KS> posted a record quarterly net loss, hit by big shortfalls at its flat-screen affiliate and weak mobile phones.

LG forecast a grim 2009 outlook, saying its sales will decline and profits worsen due to slumping demand and increasing competition, sending its shares down almost 4 percent.

The firm reported a 671.3 billion won ($489.7 million) net loss for October-December, much worse than a consensus forecast for a 172.3 billion won loss.

However, analysts said LG could gain from the turmoil hitting some of its rivals.

"LG looks to be in a better position than Nokia or Sony Ericsson and could benefit from those two companies' struggles," said Kim Ji-san, analyst at Kiwoom Securities.

"With its strength in the U.S. and Korean markets, LG could gain market share by expanding a bit more into emerging countries and Europe."

Top mobile maker Nokia is expected to announce fourth-quarter earnings later on Thursday that will have dropped by more than half as the global slowdown saw consumers buying fewer gadgets, a Reuters poll of 35 analysts showed.

BIGGER-THAN-EXPECTED LOSS

Sony said it now expects an operating loss of 260 billion yen ($2.9 billion) for the year to end-March, after previously forecasting a 200 billion yen profit.

A downward revision had been expected, but the scale of the cut was far bigger than the 100 billion yen loss predicted by local media.

Sony will give further details of a restructuring at a 5.30 p.m. (0830 GMT) briefing in Tokyo, attended by CEO Howard Stringer.

Ahead of the profit warning, Sony shares closed down 2.6 percent, underperforming a 1.9 percent gain on the benchmark Nikkei average <.N225>.

Rival Samsung Electronics <005930.KS> this month reorganized itself into two major groups in response to the global downturn, while Panasonic <6752.T> has also cut its outlook and stepped up restructuring measures.

Last month, Sony said it would cut 16,000 jobs, curb investment and pull out of some businesses to slash $1.1 billion in annual costs.

In Taiwan, AU Optronics Corp <2409.TW>, the world's third-largest LCD maker, posted a record quarterly net loss, nearly double market expectations, but gave a cautiously upbeat outlook for the first quarter, possibly signaling that the LCD sector's latest downturn may be near a bottom.

(Additional reporting by Marie-France Han in SEOUL and Roger Tung in TAIPEI)

(Writing by Anshuman Daga, Editing by Ian Geoghegan)