PSP will allow users to access PlayStation anywhere
Sony Computer Entertainment (SCE) has surprised industry watchers by announcing it will launch a portable game console at the end of 2004.
SCE, maker of the popular PlayStation game console series, said its new handheld console would be called PSP and extend PlayStation's reach.
But the news wiped almost 10% off shares in rival Nintendo, until now the clear leader in the handheld game market.
Sony shares rose 5% on the news, as analysts suggested the group had made a strong move.
"While Nintendo still holds the competitive edge in the market for portable games, it is safe to assume that this move by Sony will eat into Nintendo's profits down the road," said Makoto Suzuki, a senior fund manager at Chuo Mitsui Asset Management.
Sony insisted its intention was to widen the portable games sector as a whole.
They're going to try to source as much as they can from Sony, so it's definitely going to be positive for the Sony parent company
Richard Chu, ING Securities
"It is not that we want to face off with Nintendo.
"What we foresee is that, with other firms in the same market, we hope to expand the game market itself by offering a variety of products," an SCE spokesman said.
Analysts were nonetheless downbeat about the consequences for Nintendo, whose popular Game Boy series has until now been virtually unchallenged.
"This could be a big worry," said Takeshi Tajima, an analyst at BNP Paribas.
Mr Tajima suggested Nintendo could become vulnerable to a price war if it loses its status as the market leader.
"That could depress Nintendo's earnings," said Mr Tajima.
Sony, meanwhile, looks set to receive a welcome boost from the move.
The group said PSP would feature a backlit, thin-film transistor liquid crystal display that can show DVD quality images.
Specific details of PSP's release and pricing are to be disclosed later but analysts were already factoring in a healthy boost for a number of Sony divisions.
"They're going to try to source as much as they can from Sony - liquid crystal displays and so forth - so it's definitely going to be positive for the Sony parent company," said Richard Chu, an analyst at ING Securities.
The lift comes at a good time. Last month, Sony revealed it had lost 111bn yen (£579m; $923m) in the first three months of 2003.
This was almost 20 times the loss for the same period last year.