* Fujitsu Q2 oper profit down 42 pct vs consensus 46 pct fall
* Retains annual outlook - still above market forecast
* NEC Elec sees bigger annual oper loss, more than mkt fcast
* Demand still a big worry for sector - analysts
* Taiwan's UMC sees weaker Q4 wafer shipments
(Recasts lead, adds UMC results, fund manager comment)
By Mayumi Negishi and Mariko Katsumura
TOKYO, Oct 28 (Reuters) - Results from Japanese technology groups such as Fujitsu and NEC Electronics indicated the worst is not yet over for the struggling sector as the sector grapples with sluggish demand.
NEC Electronics, Fujitsu's rival in high end chips, expects a slowdown in chip output, while Taiwan's UMC, the world's No.2 contract chip maker, forecast weaker wafer shipments in the fourth quarter.
Fujitsu, Japan's biggest IT services firm, posted a smaller-than-expected quarterly fall in profit as cost cuts outweighed the impact of sluggish sales of PCs, hard drives and chips. It however stood by its annual target, which analysts said hinged on a recovery in IT demand.
"If the global economy weakens once again before things get better, it will threaten the very viability of some operations," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management Co Ltd.
Fujitsu, the world's No.4 IT services provider, is hurrying to shed non-core operations as the sector sees a series of shake-ups, including Oracle's purchase of Sun Microsystems, amid increasing competition.
Chasing bigger rivals IBM and Hewlett-Packard, Fujitsu is restructuring its semiconductor operations, which are grappling with weak demand and fierce competition.
Fujitsu stuck to its forecast for a 90 billion yen annual operating profit, above the 71 billion yen average estimate from 14 analysts polled by Thomson Reuters I/B/E/S and up 30 percent from a year ago
"The annual forecast is a high hurdle," Shigeo Sugawara, senior investment manager at Sompo Japan Asset Management said. "Systems integration businesses tend to lag the economy cycle, so I'm not as optimistic about Fujitsu's H2 outlook."
Many potential systems integration deals had been delayed in Japan, Fujitsu's Chief Financial Officer Kazuhiko Kato told reporters.
"But we have been winning some deals in October, and I'm not too worried," he said. "We hope to somehow win some major deals in Germany and around Europe before the end of the financial year."
Fujitsu reported an operating profit of 18.9 billion yen for July-September, down 42.2 percent from a year ago, but beating a consensus estimate for a 17.4 billion yen profit.
Net profit jumped to 72.5 billion yen from 4.3 billion yen, on an 11 percent decline in sales.
For a related graphic, click: http://graphics.thomsonreuters.com/109/JP_FJTS1009.gif
BLEAK CHIP OUTLOOK
Fujitsu, whose system chip customers include Canon, said demand for its microchips was set to weaken, and orders had peaked in June, pointing to a bleak landscape for Japan's cut-rate market.
Rival NEC Electronics reported a far bigger 15.5 billion yen loss in July-September versus a 495 million yen loss a year ago, and cut its annual outlook on weaker sales of its high end system chips.
NEC, which is set to merge with Renesas Technology Corp in April, is aiming for a 50 percent usage rate at its advanced plant in northeastern Japan in October-December, as demand slumped for system chips such as those used in Nintendo's Wii game console.
The outlook was also cautious from some Taiwan's chipmakers.
United Microelectronics Corp, which beat expectations with a big jump in third-quarter profit, expects its fourth-quarter wafer shipments to fall as much as 3 percent on a quarterly basis, while it sees average selling prices staying flat or rising 3 percent.
For a related graphic, please click:
http://graphics.thomsonreuters.com/109/TW_UMC1009.gif
Taiwan's foundries UMC and sector leader TSMC still plan sharply higher capital spending next year, meaning even tougher competition for Japanese chipmakers ahead.
Japanese microchip tester maker Advantest Corp, which vies with Teradyne Inc, saw its operating loss widen by nearly 70 percent to 3.5 billion yen in July-September Its orders fell about 21 percent in July-September.
Ahead of the results, Fujitsu's shares fell 0.2 percent versus a 1.9 percent drop in Tokyo's electrical machinery index. Fujitsu's shares gained 12 percent in July-September, outperforming a 6 percent rise in the index. (Editing by Michael Watson and Anshuman Daga)