Updated from 7:08 a.m. EST

Intel's ( INTC) profit plunged 39% in the fourth quarter, as the company signaled that its bottom line would continue to be pressured by a price war with rival Advanced Micro Devices ( AMD).

That concern offset any upside from the chipmaker beating Wall Street's lackluster fourth-quarter expectations. Shares of Intel fell $1.03, or 4.6%, to $21.27 in early trading Wednesday.

On a post-earnings conference call, CEO Paul Otellini said "2006 was a challenging year and our response was to drive for product and technology leadership aligned with the fast growing segments of the marketplace."

Otellini said Intel's next generation of microprocessors featuring 45-nanometer transistors will keep Intel at the technology forefront. And he said he was optimistic that Microsoft's ( MSFT) forthcoming Vista operating system would have a positive impact on sales of consumer notebook PCs.

But Intel's management refused to provide specific details on 2007 pricing for its processors -- a metric that industry watchers believe will be key to the company's fortunes.

"We do believe it's going to be a competitive business environment and we're going to have to fight to win orders," said CFO Andy Bryant.

And while Intel said its priority was on retaking share it recently lost to AMD, management declined to estimate what the company's market share was at the end of the year, preferring to wait for published numbers from industry research firms.

Intel said sales in the three months ended Dec. 30 totaled $9.7 billion, at the top of the company's guided range of $9.1 billion to $9.7 billion in revenue.

Net income was $1.5 billion, or 26 cents a share, compared to the profit of $2.5 billion, or 40 cents a share, that Intel posted a year ago this time.

Analysts polled by Thomson Financial were looking for EPS of 25 cents on sales of $9.45 billion.

Intel said it had a gross margin level of 49.6%, in line with its guidance of 50% gross margin, plus or minus a couple of points.

The company said average selling prices of its microprocessors increased in the fourth quarter, even as total unit shipments increased to record levels.

By contrast, rival AMD warned the Street last week that unit shipments were up in the quarter, but that average selling prices declined significantly -- an indication, according to many analysts, that AMD was being forced to slash prices in order to keep selling its chips.

Intel, which revamped its entire microprocessor product line in the summer of 2006, said the higher selling prices owed to a mix shift to leading-edge processors in all segments, along with growth in laptop chips as a percentage of its PC microprocessor product mix.

According to Intel, average selling prices for server and notebook chips increased sequentially in the fourth quarter, while desktop ASPs were flat.

But the increase in the price of its chips was offset by higher charges for underutilization in its factories, as well as by unspecified writedowns in its flash memory business and start-up costs for its new NAND joint-venture with Micron ( MU).

And Intel's profit margins appeared stalled for the foreseeable future. The company projected gross margin of 49%, plus or minus a couple points in the current quarter and 50% gross margin, plus or minus a few points, for 2007.

Those margin levels are down from the 55% to 60% levels the company regularly notched up before the recent price war with AMD.

Intel attributed its projections for stagnant margins to the costs of equipping its factories to produce a new generation of chips featuring 45-nanometer transistors. Bryant said the ramp-up will take two percentage points out of its gross margin in 2007.

Revenue in the seasonally slower first quarter will range between $8.7 billion and $9.3 billion, Intel said. Spending on research and development as well as marketing and administrative costs will range between $2.6 billion and $2.7 billion.

For 2007, Intel pegged MG&A (marketing, general and administrative) spending at $5.3 billion and R&D spending at $5.4 billion. Capital expenditures will be roughly $5.5 billion, plus or minus $200 million, in 2007, as the company incurs "significantly higher" equipment spending to ramp up manufacturing of new chips featuring 45-nanometer circuitry.

Intel said the increase in capex will be more than offset by savings in a variety of areas. The company said it is on track to generate $2 billion in spending and manufacturing cost savings in 2007, in addition to the savings it will generate from a previously announced restructuring effort.

As a result of the restructuring, Intel said its headcount at the end of 2006 totaled 94,100 people, vs. 102,500 at the end of the second quarter.

Intel said chipset unit sales in the fourth quarter were flat compared with the third quarter, while motherboard units were lower sequentially.

The company's fourth-quarter EPS was helped by the sale of its communications-chip business to Marvell Technology ( MRVL), but included an impairment stemming from the decision to sell a chip-fabrication facility in Colorado. The net impact was roughly a 2.5 cents-a-share contribution to EPS.