Starting with the European version of the PS3 that is set to debut on March 23, the paper said Sony plans to use a chip that can handle only the graphics of predecessor PlayStation 2 instead of the current chips that can handle both the computing and graphics functions for the PS2.

Sony's game unit, Sony Computer Entertainment (SCE), will distribute compatibility software on the Internet so that users can play PS2 games on the PS3, it said.

Sony said last month the European version of the PS3 would play fewer PS2 video games compares with models launched in Japan and the United States as software would take over some of the functionality that was originally taken care of by dedicated chips.

Sony loses money at first on each PS3 sale due to high production costs.

The company has said it aims to bring the negative PS3 margin to a break-even point toward the October-March second half of next business year by component cost savings on chips.

Sony also said last month it would cut back on future chip spending and may not produce advanced chips used in its PS3 in-house, adding that investment in chips would come down significantly from the $3.9 billion allocated over the three business years from April 2004.

Sony is already producing the cell chips, dubbed "supercomputer on a chip," for the PS3 using 90- and 65-nanometer circuitry and plans to move on to the 45-nanometer level by 2009. A nanometer is one billionth of a meter.

Narrower circuitry enables a smaller chip to be used and helps manufacturers cut per-chip production costs.

Improving profitability in its chip division is important for Sony, which targets an operating margin of 5 percent in the business year from April, up from an estimated 0.7 percent in the current year.

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