UPDATE 2-Tiffany ordered to pay Swatch $449 mln in damages, cuts outlook

(Corrects to show charges will reduce earnings per share by $2.30-$2.35 and not to $2.30-$2.35)

By Silke Koltrowitz and Ryan Vlastelica

ZURICH/NEW YORK, Dec 22 (Reuters) - Tiffany & Co (NYSE: TIF - news) on Sunday said a Dutch arbitration court ruled that it must pay Swatch Group (Other OTC: SWGAF - news) 402 million Swiss francs ($448.79 million) in damages over their failed joint venture to produce and market watches, and the New York-based jeweler slashed its profit outlook for the year.

Swatch, the world's largest watchmaker, and Tiffany, a New York-based jeweler, had struck an agreement in 2007 to develop watches under the Tiffany brand together.

The arrangement, intended to last for 20 years and give Tiffany a much bigger place in the luxury watch market, never turned into big business for either company, and the deal ended in acrimony in 2011.

The companies sued one another in an arbitration court in the Netherlands, where their Tiffany Watch Co joint venture was domiciled. The case went to arbitration in 2012.

Michael Kowalski, the chief executive of the luxury retailer, said in a statement that he was "shocked and extremely disappointed" with the court ruling, issued on Friday, and that the company was reviewing its options.

In their lawsuits, Swatch Group had faulted Tiffany for "systematic efforts to block and delay development of the business," while Tiffany had said that Swatch did not honor the terms of the agreement, including providing adequate distribution.

Kowalski said Tiffany had sufficient financial resources to pay the full amount of damages. Tiffany said it would fund the award from immediately available cash on hand and funds from existing debt facilities, and that it didn't expect the ruling to impact its short or long-term business plans.

For Tiffany, the dissolution of the deal with Swatch was a huge setback in its efforts to once again be a big player in the world of luxury watches.

The company only gets about 1 percent of sales from watches now, compared to about 9 percent in the late 1980s. That shrank as the company decided to focus more on its engagement jewelry business.

Kowalski said in a statement on Sunday that Tiffany is moving forward with its plans to design, produce, market and distribute its own Tiffany & Co brand watches.

Tiffany said it would record a fourth-quarter charge of $295 million to $305 million as a result of the ruling. It said the charges would reduce earnings by $2.30-$2.35 per diluted share. In November, Tiffany had forecast earnings per share of $3.65-$3.75 for the fiscal year to January.

Shares of Tiffany's closed at $90.62 on Friday.

($1 = 0.8958 Swiss franc) (Reporting by Silke Koltrowitz in Zurich, and Ryan Vlastelica and Phil Wahba; editing by Sonya Hepinstall and Christopher Wilson (Oslo: WILS.OL - news) )