A price war could be looming in the handheld computer market, as a slowing US economy hits sales and hardware makers are left with inventory on their hands. Palm Computing and Hewlett-Packard have become the first to cut prices, reducing prices for their most popular handhelds. The price cuts are designed to clear the decks for upcoming product launches, and could see other device makers following suit. If the price cuts hit Europe it will add to the difficulties of handheld makers such as Psion, which are struggling to develop the European wireless PDA market. On Wednesday Palm cut prices for the Vx by $50 to $299 (about £200), cut $20 off the price of the low-end m100 and said it would keep a $30 discount on the $329 Palm IIIc colour model. HP earlier this week reduced the Jornada 548 by $50. While lower prices might be welcomed by consumers and businesses, they could mean trouble for companies that don't have excess inventory to shift, such as Palm OS licensee Handspring. "Given the high levels of inventory at Palm and in the channel, we believe there could be the potential for a price war come May, which would have a negative impact on both Palm and Handspring," Lehman Brothers analyst Joseph To wrote in a research note this week. Handheld makers have not proved immune to the slowdown in US spending, as some industry observers had hoped, and manufacturers on both sides of the Atlantic are now being forced to reconsider their positions. Two North American handheld makers, Handspring and Research In Motion, are announcing financial results this week, following on from Psion's annual results a month ago. Key for Palm and HP will be reducing inventory as they ramp up production of new handhelds. In Palm's case, the recently-announced m500 and m505, with sought-after features such as expandability and colour, are due out this spring, but could draw buyers away from the similar Palm V series. Earlier this week Palm said it would delay volume shipments of the 500 series. In HP's case, the company is looking to push a new entry-level handheld -- the Jornada 525 -- which, at $359 (£250) is its first Windows PocketPC device at a mid-range price level. "HP are the only PocketPC guys who have inventory issues," said IDC analyst Tim Mui. While the slowdown hasn't yet spread to Europe, mobile handset and handheld computer makers here are cutting staff and scaling back production in a bid to avoid getting into Palm's situation. Because the European market is more fragmented than that of the US, industry observers expect that inventory could be a problem. "I wouldn't be surprised if inventory levels turn out to be very high in Europe," said Thomas Reuner, an analyst with Gartner Dataquest. Psion has tried to focus on the lucrative enterprise market, acquiring Teklogix and building an enterprise division around the company, but Palm and Microsoft are aggressively going after the same target. What's more, the European market for handhelds is still nascent, and might not mature until the arrival of wireless systems such as GPRS, which has been delayed. "There is a tacit acknowledgement that [PDAs] are there in the business environment, but there's no proactive support," said Reuner. "The efficiency gains through PDAs are still minimal, and probably will be until there is better wireless access, at the earliest in 2002 or 2003." Psion and handset makers like Nokia, Ericsson and Motorola have pinned their PDA hopes on Symbian, an alliance formed around Psion's EPOC operating system. But flotation of the group was delayed when financial markets soured last year, adding to the question marks over Psion's future. Psion hopes to break into the wireless handheld market, but its plans were thrown off course when development partner Motorola pulled out of the "Odin" project and Psion officially shelved the project last month. "They will come up with some kind of wireless solution, but will not be first to market, as they had planned," said analyst Reuner. Ian Fried and Richard Shim of CNET News.com contributed to this report. Take me to the Mobile Technology Special Have your say instantly, and see what others have said. Click on the TalkBack button and go to the ZDNet News forum. Let the editors know what you think in the Mailroom. And read other letters.