STOCKHOLM, USA:  Mobile phone maker Sony Ericsson posted a smaller than expected third-quarter pretax loss on Friday, boosted by big cost cuts, but said it expected the market to remain tough for the rest of the year.

The global handset market has been slammed by the recession and Sony Ericsson expects the market to have contracted around 10 percent by end-2009, an even more pessimistic view than the 7 percent forecast by market leader Nokia.

Sony Ericsson, owned by Sweden's Ericsson and Japan's Sony Corp, reported a quarterly pretax loss of 199 million euros ($297 million), an improvement on the 283 million euro loss in the second quarter.

The mean forecast in a Reuters poll of 16 analysts had been for a 274 million euro loss.

"The reduced loss was due to better gross margin, as well as reduced operating expenses," Sony Ericsson said in a statement.

Sony Ericsson is in the process of cutting costs by 880 million euros, with the full effect due in late 2010.

The company's gross margin was 16 percent versus a forecast of 13.9 percent and 12 percent in the second quarter.

The result helped boost parent Ericsson's share price by 2.5 percent to 73 crowns at 0851 GMT, outperforming the wider Stockholm bourse.

"Expectations that they (Sony Ericsson) will make big losses next year have to be revised to show that they maybe won't make any money, but that at least they will break even," Martin Nilsson, analyst at Handelsbanken Capital Markets, said.

"In that way it affects Ericsson a little as they won't be a burden at least."