TOKYO (Reuters) - Sony Corp has pulled the plug in Japan on sales of a next-generation flat TV due to sluggish demand, a setback for a product the company had trumpeted as a sign of its revival as an innovator.

Sony said it had stopped production of ultra-thin TVs using organic light-emitting diode (OLED) technology for Japan, just a little over 2 years since it launched its first set. It plans to keep selling the TVs in overseas markets, a spokesman said.

OLED displays use organic, or carbon-containing compounds that emit light when electricity is applied. They produce crisp images and do not need backlighting, making them slimmer and more energy-efficient than LCDs, the most popular type of flat TV.

Sony has aimed to become a leader in the technology and positioned the product as crucial in its drive to regain its reputation as an innovator after losing out to Apple Inc in portable music and Nintendo in video games.

“I want this world’s first OLED TV to be the symbol of the revival of Sony’s technological prowess. I want this to be the flag under which we charge forwards to turn the fortunes around,” then president Ryoji Chubachi told a briefing in October 2007.

It is still technologically difficult to make large OLED panels and to produce them cheaply, limiting their potential as a mass-market product. Sony’s only model is an 11-inch set sold for 200,000 yen ($2,222) in Japan, considerably smaller and more expensive than other flat TVs.

“As flat panel TVs are getting bigger and cheaper, hurdles for OLED models have become higher, at least in the short term,” said Hisakazu Torii, vice president of Japanese TV market research at DisplaySearch.

Torii said the next big trend in the market will be 3D TVs and LCD TVs using light emitting diode backlights, and that mass adoption of TVs with OLED panels is some time off.

Sony said it would end sales of OLED TV in Japan when inventory runs out. It plans to continue putting money into research and development and production for North America, Europe and other overseas markets.

“We will continue to consider new products and applications including OLED TVs,” Sony spokesman Shigenori Yoshida said.

SLOW SHIFT

Sony was criticised for being slow in the industry’s shift to flat panel displays from bulky cathode-ray tube sets a decade ago, and has been struggling to keep up with rivals in the race to develop ever bigger and cheaper flat TVs.

Competition will likely be just as tough in OLED TVs, analysts said.

OLED displays are used widely in mobile gadgets such as cell phone screens, and the top makers of those panels, which include South Korea’s Samsung Mobile Display, will likely have some advantage in applying the technology to TVs.

“South Korean makers are aggressively working on small- and mid-sized OLED displays,” said Kazuharu Miura, analyst at Daiwa Securities Capital Markets.

Sony did not disclose how many OLED TV sets it has sold. DisplaySearch said it estimates worldwide shipments of about 2,000 Sony OLED TVs in 2009.

Shares of Sony closed down 0.2 percent at 3,030 yen, underperforming a 0.2 percent rise in the benchmark Nikkei average.