Intel, the world's largest maker of semiconductors, said it will incur US$1 billion ($1.28 billion) in missed sales and higher cost to fix a design flaw in one of its chips.

The error will cut first-quarter revenue by US$300 million and gross-profit margin by 2 percentage points, Intel said.

The company will spend US$700 million to replace potentially faulty chips and systems.

The design fault is in a support chip, or chipset, for Intel's latest processor model called Sandy Bridge, unveiled this month as part of a bid to improve PC graphics and ward off a challenge by AMD.

California-based Intel said it had corrected the flaw and begun manufacturing a new version of the chip that will resolve the issue.

"Is it going to be a near-term distraction and something for investors and customers to gripe about? Absolutely," said Craig Berger, an analyst at FBR Capital Markets in New York.

"But the stuff is relatively new. There are probably not many of them out. That's helping them mitigate losses."

Intel said it expects to begin delivering the updated version of the chipset to customers in late February and be in full production again in April.

The company has shipped about eight million of the Cougar Point chips to customers which will have to be replaced, chief financial officer Stacy Smith said.

"We can recover on this pretty quickly," Smith said. "Intel may be able to return to full production in March."

Sandy Bridge, Intel's latest processor design, doesn't work without the new chipset and therefore the availability of computers built on that product will be held up, Smith said.

That delay reduces the lead that Intel was expected to have over AMD in the introduction of their latest designs and increases the incentive for computer makers to look at AMD's forthcoming Llano chips, said Gus Richard, an analyst at Piper Jaffray.

Consumers have not reported problems with the few machines that have been sold since January 9, when computers with the potentially faulty chips first went on sale, Smith said.

- BLOOMBERG