Japan's Sega Corp pulled the plug on its Dreamcast game machine on Wednesday, announcing it would suffer a record loss by ending production of the loss-making console in March in a dramatic refocusing on video game software.

The world's third-biggest maker of game hardware and software said the shutting down of Dreamcast will generate 80 billion yen ($689 million) in extraordinary losses, leading to a record net loss of 58.3 billion yen in the current year to March 31.

Analysts applauded the end of the 128-bit Dreamcast as a crucial step towards profitability for a company facing four straight years of losses, but they said the size of the special loss was bigger than the 50 billion yen most had expected.

Dreamcast, launched in 1999 equipped with a 56K modem that connected users to games, chatrooms and online tournaments, faced fierce competition from smoother, faster machines rolled out by rivals Sony Corp and Nintendo Co Ltd .

Sega said it would stay in the software business, throwing a lifeline to Sonic the Hedgehog and other characters and games that became synonymous with the world's first Internet-compatible video game machine.

"The hardware business was becoming a heavy burden to the company," said executive vice president Hideki Sato. "By shifting away from it and into the software business, where we are stronger, we will aim to get back in the black in the next year."

It accepted 85 billion yen in gift funds from Sega president Isao Okawa to help offset losses.

SEGA TO EMBRACE PLAYSTATION, XBOX

Operating losses from the hardware division were expected to balloon to 43.5 billion yen in the current business year from 38.4 billion yen a year earlier, the company said, adding that Dreamcast sales fell 44 percent short of an initial goal.

In the business year to March 2000, its hardware division earned 23 percent of total sales and contributed to 95 percent of its total operating loss.

"This is positive in a sense that bleeding is finally going to be staunched," said Hajime Yagi, senior portfolio manager at Meiji Dresdner Asset Management.

Sega said it will now focus on providing game software content and entertainment titles to other video game makers, including Sony, Nintendo and Microsoft Corp , whose new game console system "XBox" will be launched this fall.

The company also said it agreed with Sony to cooperate in online games and other network-related services.

Sega's shares have surged 57.9 percent since last week on relief that the company appeared set to cut its losses on Dreamcast and play to its perceived strengths by supplying games to other makers. In the same period, the benchmark Nikkei index slid 1.3 percent.

Sega ended Wednesday trade 2.74 percent higher at 1,690 yen prior to the announcement while the Nikkei eked out a 0.12 percent gain to close at 13,843.55.

CHALLENGES REMAIN

Sega said it will trim its workforce to the minimum level needed for operating a content business, and would consider cutting back or divesting its European and American operations as well as affiliated enterprises.

It said it expects to sell nine million software titles this business year and boost that by 50 percent next by selling games designed for other machines.

Sega said it plans to develop by the end of this year game content for Palm Inc's handheld computers, which last year enjoyed dominant share of more than 70 percent in the fast-growing U.S. hand-held computer market.

Rival game software maker Electronics Arts Inc said that Sega will face a tough struggle to provide software for other platforms, because it would be handicapped by unfamiliarity with the programming requirements of rival consoles and the long development cycle for video games.

"They're starting from scratch," said John Riccitiello, president and chief executive of EA, which is the top game vendor for Sony's PlayStation 2 in the U.S.

"It's not quite as though this is GM saying we'll make BMWs, but it's the same kind of proposition," said of the rival gamemaker. "They may look like BMWs, but I doubt if they'll drive like BMWs."