Major solar power companies warned of an uncertain outlook for the industry, faced with oversupply and falling prices as governments in key markets withdraw incentive schemes and Asian competitors circle.

SolarWorld, Germany's No.2 solar company by sales, echoed recent comments by global peers when it warned on Thursday that its outlook for higher sales in 2011 may be undermined by free-falling prices and overcapacity.

Phoenix Solar cut its outlook to say it expects sales to fall this year instead of remaining flat or rising, blaming intense pricing pressure in the first half of the year.

Shares in the company dropped 1.8 per cent but then recovered amid a wider market bounce to be up 0.4 per cent.

Both companies ramped up production last year to meet a surge in demand from Germany and Italy as customers rushed to buy solar before governments started to phase out incentive schemes. SolarWorld makes the panels that convert sunlight to electricity and Phoenix Solar builds and installs solar plants.

Now they have been hit by a toxic mix of high inventories and slower demand as a boom that has been expected by some industry analysts following Japan's nuclear disaster fails to materialise.

Germany and Italy are reducing support schemes to make the solar sector more productive, but meanwhile they are not increasing demand. After deciding to pull out of nuclear Germany is now looking to coal and gas to fill its needs.

The result: a perfect storm for industry operating margins.

"In general (it's) very difficult to see the bull case for most German solar companies in my view, and now lending will become more difficult it should be interesting to see how it all play out," said Jon Sigurdsen, fund manager at DnB Nor unit Carlson.

SolarWorld Chief Executive Frank Asbeck said he still expected 2011 sales to beat last year's 1.3 billion euros ($1.84 billion.)

However in a statement the company cautioned: "The political and macroeconomic background conditions may, however, lead to cyclical industrial surplus volumes and corresponding undercut prices in the solar market in the second half."

US-based First Solar , the world's largest solar company by market value, warned on its full-year profit last week, pointing to lower prices for panels as a consequence of falling government support in Europe, the industry's biggest market.

SolarWorld's shares, however, rose due to its better-than-expected second-quarter operating profit of 40.2 million euros, against the 28.7 million average forecast in a Reuters poll of analysts. – Reuters