Surging demand for Nintendo DS and the Wii handheld games consoles spurred a 46.1 per cent jump in underlying sales at specialist retailer Game Group and helped the new owner of Gamestation shops to shake off a warning that margins had come under pressure.

Shares in Game Group rose almost 3 per cent, despite its alert that gross margins would fall by up to 3.25 per cent over the full year, following an increase in hardware sales against higher-margin software sales.

Shares were up 7.5p at 250p in early trading in spite of concerns that a weakness in Nintendo's supply chain would lead to a shortage of the consoles at UK retailers during the crucial Christmas sales period.

Over the weekend it emerged that Nintendo would be suspending its TV advertising because of a severe shortage of the console amid "unprecedented" demand.

Nintendo, which is producing 1.8 million consoles a month, has raised production targets several times in recent months. It plans to ship 17.5 million units worldwide this year, up from 14 million.

It came as Nintendo's rival Sony, which makes the Playstation3 computer game box, said that it would not be hit by the credit crunch and was on track to deliver an operating margin of 5 per cent this year.

Peter Lewis, the chairman of Game, which operates in Ireland and continental Europe as well as the UK, said that sales growth over the 45 weeks to December 8 had been "exceptional" and reflected "strong consumer demand for all product formats, particularly so for the Nintendo DS Lite and Wii console".

But he added that the UK market was highly competitive as rival retailers move to capitalise on the growing market for computer games and their high-quality graphics.

"As we said in September, the higher volumes and value of new generation platforms will increase the hardware share of total sales for the year to January 2008. The substantially lower margins achieved on hardware, compared to software, and lower margins from Gamestation will reduce our overall gross margin," he said.

"Taken together, the board is of the view that gross margin for the full year will be around 275 to 325 basis points lower than last year."

Nevertheless, analysts began to upgrade their profits forecasts.

Andrew Wade at Seymour Pierce described today's trading update as "stunning" and said he would increase his annual profits forecast for Game to more than £60 million, compared with £56.4 million previously.

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