Personal computer prices are continuing to fall sharply, squeezing the margins of the industry leaders. Sales are rising, but even the largest vendors are finding the going tough because intense competitive pressure keeps forcing prices down.

Lower PC prices cut Intel's profits by 36 per cent and compelled it to lay off 3,000 staff; lower prices also cut Compaq's profits by 96 per cent and contributed to IBM's first quarter profit decline of 13 per cent.

Prices look set to continue to fall through the current quarter as dealers try to get rid of excess stock in preparation for introducing new models in the third quarter.

Compaq admitted it had overstocked the reseller channel and said this would take the second quarter to rectify.

Some PCs are now selling in Britain for little more than £500.

In the Republic, prices have also dropped significantly. At the CompuStore on Dublin's St Stephen's Green, sales staff say there has been an average drop of 20 per cent over the past year in the cost of buying an up-to-date model. This means that a typical PC purchase that used to cost £1,700 now comes in at around £1,350.

Intel has reacted to falling prices by introducing its new Celeron chip aimed at PCs priced below $1,000 (£680). Regional director Dave Hazell says the company believes that machines based on the Celeron will appeal to home users and some smaller business users, but that the larger part of the market will remain with "performance" PCs.

With this in mind, Intel also introduced Pentium II chips running at 350MHz and 400MHz. PCs using these chips will come on to the market in the next few months. "The second half of the year should be more normal," says Hazell.

The battle among the leaders for market share is making it harder for second-tier vendors to stay in the business. Siemens-Nixdorf has announced that it will withdraw from manufacturing, disposing of its German factory to Acer of Taiwan, one of the strongest of the second tier. Dutch manufacturer Tulip has gone into receivership.