Nokia is banking on 3G technology to boost sales
Shares in the Finnish mobile phone giant closed down 12% on the news.
A warning from the sector leader - which controls 37% of the market - has shaken investor confidence in the mobile phone industry as a whole.
Nokia has reduced the number of handsets it expects the industry to sell this year between 400 million and 420 million hand sets, down from previous expectations of 440 million unit sales.
Renewal
Despite the warning, the firm reported profits for the first three months of the year that, while lower than the 2001 figure, beat analyst estimates.
"Mobile phone profitability exceeded all expectations," said Nokia chairman Jorma Ollila.
Nokia reported net profits of 863m euros, down from 975m euros a year earlier.
The company admitted to "challenging conditions" in the US, Europe and China, and warned of "general weakness in all key regions".
Nokia is hoping for a boost to sales from the transition to 3G - the new faster generation of mobile phones that allows users to watch video clips and download colour pictures from the web.
"This is a year of renewal for our industry," Nokia said, highlighting multimedia messaging as the main driver of future growth.
The company said it expected to launch its first 3G mobile device between July and September, and its first mobile network before the end of the year.
But there was still a great deal of uncertainty over the popularity and speed of take-up of the new, faster phones.
"The industry remains in transition,'' Nokia said. "The speed of this transition has been slower than was anticipated.''
More share gloom
The announcement saw Nokia shares close 12.6% lower at 20.49 euros, and hit sentiment on Nordic stockmarkets.
The benchmark index on the Finnish stock market closed 7.44% down at 7,452.54 points
And shares in Nokia's Swedish rival, Ericsson, dropped 7% in the aftermath of the warning.
"Nokia is very good at protecting the margins - but it has to be a top-line growth story as well, so that's what is hitting the stock," said analyst Susan Anthony at Credit Lyonnais.