Robust sales of the Pre smartphone helped Palm Inc post a smaller-than-expected loss, but a tepid second-quarter sales forecast and a plan to sell more shares helped snuff out a rally and sent its shares down nearly 2% on Thursday.

Palm, which has lost money for more than two years, has staked its future on devices based on its webOS platform such as the Pre and Pixi device. It unveiled the Pre -- taking on Apple Inc's iPhone and Research in Motion's BlackBerry -- in June to mostly good reviews.

Palm's shares have quadrupled this year as investors bet the device would entice consumers.

It shipped 823,000 smartphones -- mainly the Pre -- in the fiscal first quarter, with many Wall Street estimates in the 700,000 to 800,000 unit range.

Palm forecast a second-quarter non-GAAP revenue of $240 million to $270 million, lagging an average forecast for revenue of just over $345 million.

Analysts said the company's move to raise capital also hurt the stock.

Palm said it plans to sell 16 million shares of common stock. Private equity firm Elevation Partners, which already owns a 33% stake in Palm, expects to buy $35 million worth of stock in the offering.

"They had a really strong 1Q. Obviously, well above expectations," said Avian Securities analyst Matthew Thornton, who estimated that Pre sales easily beat his forecast.

"But when you back out the first-quarter upside and the full-year guidance that they provide, then there really isn't much upside for the last three quarters."

Although Palm does not break out Pre data, it said the "vast majority" of smartphone sales came from Pre.

"We're receiving excellent reviews from customers who bought the Palm Pre for personal use," said chief executive Jon Rubinstein, appointed to the company's top post days after the Pre was launched to the public.

"The Pre is also being adopted as a popular business device," he told analysts on a conference call. "Deployments of the Pre within large companies are on the rise."

Palm recently cut the price of the Pre by $50 to $149 for new customers that sign a two-year service contract.

Sprint Nextel Corp is the exclusive U.S. provider for Pre, but Verizon Wireless, a venture of Verizon Communications Inc and Vodafone Group Plc, says it will start selling the phone early next year.

An early pioneer in handheld devices, Palm has been surpassed by rivals such as Apple and Research in Motion in recent years. Competition in the smartphone category is growing fiercer with competitors entering the market and more handset companies developing products based on Google Inc's Android platform.

Palm reported a net loss applicable to common stockholders of $164.5 million, or $1.17 a share, in its fiscal first quarter ended August 31, versus a year-ago loss of $41.9 million, or 39 cents a share.

Excluding items, the company posted a loss of 10 cents a share, beating analysts' average estimate of 25 cents according to Reuters Estimates.

Revenue on a non-GAAP basis was $360.7 million versus Wall Street's average forecast of $289.1 million.

It forecast fiscal 2010 revenue of $1.6 billion to $1.8 billion, versus Wall Street's expectations of $1.6 billion. of $164.5 million, or $1.17 a share, in its fiscal first quarter ended August 31, versus a year-ago loss of $41.9 million, or 39 cents a share.

The Sunnyvale, California-based company's stock fell to $14.19 from its close of $14.44 on Nasdaq. It had risen to $15.30 in the minutes after the closing bell.

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