The newly lean AMD is also posing a challenge to Intel for the first time in awhile, said Lao, with PC makers showing interest in AMD's low-priced notebook CPUs as well as its new high-end Phenom II CPUs. Even with a 40 percent price cut to its Core 2 Quad Q9650 processor, Intel's chips remain pricier than the Phenom II rivals.
Intel is responding. "I do not see this as a big 'kill AMD' move, although there is definitely a component in it," Lao said. "Any time they can take a shot as a bonus, why not?"
As much as it might like, Intel won't cut chip prices further in order to stimulate the PC market, said Stephen Baker, an analyst at NPD Group Inc. "It's hard to see [Intel] being any more aggressive on pricing, as it brings the specter of the government around," Baker said.
Intel has been repeatedly investigated for alleged anticompetitive and monopolistic practices. It is currently appealing a long-running European Union antitrust investigation.
Also, PC makers "don't need any more product," said Baker, who likens the weak demand for PCs to the real estate market, which is very slow despite the abundance of cheap foreclosed homes. "[PC makers] don't want to hold [chip] inventory; nobody wants to hold inventory," he said.
While consumers showed their preference for lower-priced PC models during Christmas, Baker doesn't expect PC makers to respond by breaking any new ground.
"How much lower can you get than $299 for a desktop PC?" Baker said. "If you did, I'm not sure you could stoke a lot of incremental demand."
Lao agrees that consumers are unlikely to see cheaper PCs. Intel's most-recent price cuts will be eaten up by PC makers, wholesalers and retailers,which are all suffering from weak sales volume, he said.
IDG News Service's Elizabeth Montalbano contributed to this report.