ARM and rival European chipmaker stocks fall on wary Apple outlook

* ARM and Dialog shares fall to underperform broader market

* Apple (LSE: 0R2V.L - news) forecast first revenue drop in 13 years (Adds investor and trader comment, detail and background)

By Sudip Kar-Gupta

LONDON, Jan 27 (Reuters) - Shares (Berlin: DI6.BE - news) in leading European technology and chipmaker stocks fell on Wednesday after Apple (Swiss: AAPL.SW - news) forecast its first revenue drop in 13 years.

ARM Holdings (LSE: ARM.L - news) , the British chip designer whose technology powers Apple's iPhone, fell 2 percent to underperform a 0.4 percent drop on the benchmark FTSE 100 index.

Rival German chipmaker Dialog fell 2.4 percent while AMS (LSE: 0QWC.L - news) also weakened by 1.8 percent.

Apple predicted its first revenue drop in 13 years and reported the slowest ever increase in iPhone shipments as the critical Chinese market showed signs of weakening, suggesting the technology company's period of exponential growth may be ending.

"China is a real concern for Apple because it is clear now that the iPhone is not seen as a utility product but as a luxury item," said Mark Hawtin, investment director at GAM (LSE: 0EJ1.L - news) .

Dialog had already slashed its revenue guidance in December, and at the time cited weaker-than-expected demand for chips used in mobile phones such as Apple's big-screen iPhone and Samsung Electronics' Galaxy phones.

ARM shares are down around 5 percent since the start of 2016, while Dialog's shares have fallen roughly 10 percent.

A trader at Beaufort Securities said ARM could drop by another 12 percent to 870 pence, given the signs of underlying weakness in its market as unveiled in Apple's business update.

"This whole sector is coming under more and more pressure," he said. (Editing by Atul Prakash and Louise Heavens)