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% by end-2009, an even more pessimistic view than the 7% 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 ($295.9 million), an improvement on the €283 million ($420.8 million) loss in the second quarter.

The mean forecast in a Reuters poll of 16 analysts had been for a €274 million ($407.5 million) 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 ($1.3 billion), with the full effect due in late 2010.

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

Sony Ericsson, known for its phones focusing on music and imaging, has missed out on recent mobile phone trends such as full keyboards, Internet browsing and navigation.

It has lacked a strong smartphone offering to rival Apple's iPhone and Research in Motion's BlackBerry.

Bert Nordberg, who will take over as the company's chief executive at the end of the year, said he would look for a strategic revamp of the firm's product portfolio.

"We have cleared channel inventories, and have continued to realign internal resources and improve efficiency," Dick Komiyama, the outgoing head of Sony Ericsson said.