Nintendo's Wii has been outselling the PS3 in the US and Japan

The cost of launching the PS3 console contributed to a 68% drop in operating profits to 71.8bn yen ($597m; �300m) for the year to 31 March.

The PS3 is up against tough competition from the Microsoft Xbox 360 and Nintendo Wii.

But Sony forecast a strong recovery in profits during the coming year.

New challenges

Sales for the year to March were up 10.5% to 8.3 trillion yen, but net profit was up just 2.2% to 126.3bn yen.

Losses at Sony's games division meant the firm posted a net loss of 67.6bn yen for the three months from January to March, its biggest quarterly loss for four years.

Sony has dominated the $30bn global electronics games market for years, but the PS3's launch was delayed in Europe and the console now faces fierce competition from Microsoft and Nintendo. The PS3 is being outsold by Nintendo's Wii console in both the US and Japan.

However, Sony posted an upbeat forecast for the year ahead, predicting narrower losses at its games division and strong sales of its Bravia LCD televisions.

The company is expecting a 5.8% increase in sales to 8.78 trillion yen and predicting operating profits of 440bn yen, ahead of analysts' expectations of about 380bn yen.