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Intel Corp. (INTC) discovered a design issue in a recently released chipset that is expected to cost the company $1 billion in repairs and lost revenue, as well as slightly delay the release of computers using its new microprocessor.

Meanwhile, the Santa Clara, Calif., chip maker adjusted its quarterly and year guidance to adjust for the issue as well as for contributions from a couple acquisitions.

Intel recently released its second-generation Core processors--code-named Sandy Bridge--that combine graphics and computing on a single piece of silicon. The company sees the new chips helping it gain even more traction against Advanced Micro Devices Inc. (AMD), which has developed a similar chip line of its own.

But Intel said Monday that a new chipset, which connects the Sandy Bridge processors to the other parts of the PC system, has a design flaw that causes some connection ports in the chipset to degrade over time, potentially causing hard-disk drives and DVD drives to malfunction.

Intel said the issue doesn't affect Sandy Bridge itself or any other products, and Chief Financial Officer Stacy Smith was confident Intel will be able to resolve the problem quickly. Executives said the chipset error typically isn't an issue that would show up in PCs for two to five years.

"As long as it's not a problem with Sandy Bridge itself, which it doesn't sound like it is, it's not catastrophic in the long term," Bernstein analyst Stacy Rasgon said. "They have a solution in place, and now they just need to take care of it."

Intel shares, up 9.2%, over the past 12 months, recently slipped 1.3% to $21.18.

AMD, meanwhile, grew 4.6% to $7.84 on hopes Intel's difficulties could help it gain share. The company has already released one of its combination chips for netbooks and low-end notebooks, and its chip for mainstream computing likely will be released late in the second quarter.

AMD declined to comment Monday.

Intel started distributing the affected chipset--known as the Intel 6 Series and code-named Cougar Point--on Jan. 9. The company said it has stopped shipments of the affected chip, has corrected the design issue and has started making a new version of the chip that will resolve the issue. Intel, which plans to deliver the new chipset to customers in late February, expects a "full volume recovery" in April.

Smith said less than 8 million units have been distributed to PC makers, and the number of units shipped to end customers is "relatively small."

Intel said it expects the design issue to cut its first-quarter revenue by about $300 million, though it isn't expected to hurt full-year revenue. The company pegged the cost to repair and replace the affected materials and systems in the market at about $700 million.

The $700 million price tag assumes Intel will have to replace a "reasonably large number" of motherboards, Smith said. Intel is just starting to talk with its customers about the issue, Smith said, adding the launch date of Sandy Bridge may change a bit.

But he remained confident PC makers will continue stocking Sandy Bridge--which has continued to ship as normal--in anticipation of the launch.

In the meantime, Intel will ship a slightly higher percentage of older-generation processors in the first quarter, Smith said. He expects there will be a couple million units of demand Intel won't be able to meet in the period, though it should be back on track in the second quarter.

"We believe we'll be fully caught up to customer demand by April," Smith said. "And we're working hard to see if we can pull that into March."

Intel also updated its revenue outlook to include the acquisitions of Infineon Technologies AG's (IFX.XE) wireless business and McAfee Inc. (MFE), saying it now expects first-quarter revenue to range between $11.3 billion and $12.1 billion, compared with its prior view of $11.1 billion to $11.9 billion. The Infineon deal closed Monday, and Intel said it expects the McAfee deal to close by the end of the first quarter.

The company also said it expects first-quarter gross margin to be 61%, plus or minus a couple of percentage points, compared with its previous forecast of 64%, plus or minus a couple of percentage points.

It also adjusted its fourth-quarter gross margin by about 4 percentage points from the previously reported 67.5% because the issue affected some of the chipset units shipped and produced in the fourth quarter.

For the full year, Intel projects revenue growth in the mid- to high teens, compared to its previous expectation of 10%.

The company has posted record revenue and profits in recent quarters, helped by a surge in demand for tech products following a pullback in spending during the recession. Its exposure to the enterprise market has buffered it of late from relatively weak consumer demand for PCs.

-By Shara Tibken, Dow Jones Newswires; 212-416-2189; shara.tibken@dowjones.com

--Nathan Becker contributed to this article.

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