It is becoming difficult to run businesses both for software and hardware

Sega

Sega is also in talks to sell software to Microsoft Corp's X-Box and Nintendo's Game Cube consoles, which have not yet been launched.

It will also deliver Sega games to Palm handheld computers and Motorola mobile phones.

"Yes, we are stopping production of Dreamcast at the end of March," said Sega spokeswoman, Miyako Shimizu.

Sega will continue to sell Dreamcast, including hardware, for the immediate future.

Profit warning

"It is becoming difficult to run businesses both for software and hardware that promises growth on growing sales," the company said.

"Therefore, we have decided to swiftly implement a more content-oriented business in order to secure profitability."

The company also downgraded its group-level earnings forecast in the year to March 2001.

Net loss estimates have increased to 58.3bn yen (£340m; $503m; 543m euros) from 23.6bn yen previously, on sales of 260bn yen, revised down from 320bn yen.

With this new strategy, Sega will be significantly broadening its market of consumer purchasers, while dramatically expanding its revenue possibilities

Sega

Sega said halting production of the Dreamcast game console would cost it an extraordinary loss of 80bn yen in the current business year to March.

Slow sales of Dreamcast in the Christmas season hurt the company's earnings.

Sega sold a total of 2.32m units of Dreamcast hardware in the April-December period, down 44% from its initial forecast.

In a separate statement, Sega of America announced said the company was transforming itself into a "third party videogame publisher for game consoles, focusing on its advantage in the networked gaming arena".

Sega of America has also moved to cut the price of the Dreamcast console in the US by $46 to $99.

A spokeswoman in London declined to comment on the decision to drop Dreamcast, but she confirmed Sega Europe would restructure the company to focus solely on videogame content.

Games for Palm and Motorola

A release from Sega Europe said the company would deliver Sega games to Palm handheld computers and Motorola cellular phones.

"With this new strategy, Sega will be significantly broadening its market of consumer purchasers, while dramatically expanding its revenue possibilities," the release added.

Sony's popular Playstation has undermined Sega's sales

Sega has suffered from intense competition, with its Dreamcast console failing to match the popularity of its best-selling rival, Sony's Playstation.

The strategy of providing software to third parties rather than focusing on the production and marketing of its own games console could be one way for the firm to return to profitability.

Sega made its Dreamcast announcement after the markets had closed in Tokyo. Sega's shares ended Wednesday up 2.74% at 1,690 yen.