Nintendo is holding its own in the console wars with Sony but its reliance on sales of low-margin game machines has hit operating profits, the company said yesterday.

The company reported a 78.5% decline in operating profit during the April to June quarter but said its forecast for full-year profit to increase by 3.1% still held. Its consolidated operating profit fell to 3.75bn yen (£19m) from ¥17.47bn a year earlier.

Nintendo, the creator of several popular software titles, including Donkey Kong and Pokemon, has made an encouraging start in its quest to stave off a challenge in the handheld console market from Sony's debut machine, the PlayStation Portable.

Although Nintendo has sold more than 5m GameBoy DS handheld consoles since their launch last November, sales of its GameCube consoles, which are for home use, fell by 60% during the quarter compared with the same period last year.

In addition, new software titles, including the eagerly awaited Legend of Zelda, are not due for release until later this year.

Sony, buoyed up by the successful launch of its PlayStation 2 home console, still dominates the gaming market and expects shipments to increase by a million to 13m next year.

By contrast, sales of Nintendo's GameCube, its rival to the PS2, fell 14% to ¥70.7bn over the quarter and are expected to fall by 33.8% over the coming year to just over 10m units.

Nintendo executives said it would take time for the handheld DS console to make an impact. "The difference in profitability from a year earlier is due to the fact that it hasn't been long since the DS entered markets, so costs are still high," said Nintendo's senior managing director, Yoshihiro Mori.

Still, the firm, which controls about 94% of the market in portable game consoles, said it had sold 1.38m DS games in the April to June quarter.

The already fierce rivalry between the two firms is likely to intensify over the next 12 to 18 months, when they release next-generation game consoles featuring faster chips and better graphics.