SAN FRANCISCO -- Is the latest chip party already coming to an end?

It's been barely six months since business began to pick up at semiconductor firms, following an inventory glut that had stalled sales across the industry.

But an analyst note released Wednesday containing the dreaded words "inventory correction" raised fears that another slowdown is coming.

The Philadelphia Stock Exchange Semiconductor Sector Index, which is comprised of 19 semiconductor stocks, was down 2.4% to fall back to the level it was at before a recent two-week rally.

In his note initiating coverage on Intel ( INTC) with an underweight rating, Morgan Stanley analyst Mark Lipacis warned that the December or March quarter could see below-seasonal results.

"Microprocessor unit shipments recently have outpaced PC shipments, raising the risk of double ordering and an inventory correction," Lipacis wrote. He also initiated coverage of Advanced Micro Devices ( AMD)and Nvidia ( NVDA) Wednesday, assigning underweight ratings to each company.

Intel shares finished down 2.2% to $25.81, AMD shares were up 3 cents to $13.23 and Nvidia lost 4.3% to $35.82.

Morgan Stanley makes a market in Intel shares and has provided the company with investment and noninvestment banking services in the past 12 months.

Lipacis' comments about a looming inventory problem were aimed specifically at the PC microprocessor market, and coming on the heels of Micron's ( MU) ugly quarterly earnings report Tuesday, chip firms were swimming against a current of bad news Wednesday.

Of course, Micron and its memory chip brethren have been drowning in a surfeit of DRAM chips for months -- a situation that has driven down the average selling price of DRAM and, based on comments by Micron executives Tuesday , shows no signs of abating in the near future.

The question is whether a similar fate awaits other types of silicon firms, who make everything from microcontrollers to radio frequency chips.

Judging by Wednesday's selloff, the Street appears to view the risk as limited to the PC segment of the chip market, with shares of firms that have big PC exposure like Atheros ( ATHR) and Marvell Technology Group ( MRVL) all losing ground.

Atlantic Trust SteinRoe's Fred Weiss said it's difficult to tell whether an inventory correction is indeed at hand, but noted that some of the telltale signs of a chip glut are there.

For one thing, he noted, chip supplies are tight at the moment and the holiday sales season is around the corner -- a combination that can lead customers to order more chips than they actually need to ensure that they're not caught shorthanded.

Another factor that leads to the so-called double-ordering of chips "is that all the customers think they're going to do better than they are," said Weiss. "Either they think the market's growing faster, and that's why they're ordering more, or they think that they're going to take share. And not everybody can take share."

As it stands, expectations of PC industry growth are strong, but not out of control. Last month, industry research firm IDC upped its forecast for 2007 PC unit shipment growth from 12.2% to 12.6%.

But the desirability of PCs this holiday season is a wildcard. True, Intel and AMD will both have new microprocessors available. But there's not much else in the way of cool, new PC technology to entice shoppers to spend money on laptops instead of competing electronic products like MP3 players, smart phones and video game consoles.

In a note to investors earlier this week, Citigroup analyst Glen Yeung said that PC maker Dell ( DELL) is paring back its microprocessor orders due to a perceived softness in demand from U.S. consumers -- not a good sign for the holiday season.

Of course, demand for PCs in foreign markets is on the rise -- that may ultimately determine whether chipmakers avoid another inventory glut.