LOS ANGELES (Reuters) - Nvidia Corp. will supply graphics technology for Sony Corp.'s next-generation PlayStation video game console, the companies said Tuesday.

Nvidia (Research) shares rose 5 percent on a day on which the Nasdaq tumbled 1.7 percent.

The two companies are developing a custom graphics processing unit (GPU) that brings together Nvidia's graphics technology with Sony Computer Entertainment Inc.'s advanced microprocessor, code-named "Cell."

Sony (Research), which is widely expected to launch the next version of its popular PlayStation in 2006, is developing the Cell processor with semiconductor partnersInternational Business Machines Corp. (Research) and Toshiba Corp.

Terms of the Nvidia-Sony deal were not disclosed.

Nvidia could see royalties of around $5 per chip, which would equal more than $100 million in annual revenue during the peak of the next video-game cycle, said American Technology Research analyst Erach Desai, who upgraded his recommendation to a "buy" rating from a "hold."

The custom graphics processor will be used in a range of products from computer entertainment to high-speed Internet applications and will include future Sony digital consumer electronics products, the companies said.

"If we were to include any broader consumer products reach, the incremental annual revenues for Nvidia could exceed $400 million with more than $300 million in incremental operating profits for Nvidia," Desai said in a note.

The deal will also keep Nvidia in the console gaming market, after losing the contract to make chips for the next version of Microsoft Corp. (Research)'s Xbox console, which is expected to be introduced in late 2005.

While Nvidia makes graphics chips for the current Xbox, Microsoft chose Nvidia's primary competitor, ATI Technologies Inc. (Research), for the next generation of the console. Xbox sales accounted for 15 percent of Nvidia's revenue in the most recent fiscal year.

YOUR E-MAIL ALERTS Sony Computing and Information Technology Video Games Semiconductors and Active Components or Create your own Manage alerts | What is this?

The graphics processor will be manufactured at Sony's Nagasaki Fab2 production plant and a fabrication facility operated jointly by Toshiba and Sony.

Nvidia shares ended up $1.08 to $22.81 in Nasdaq trading after rising as high as $24.96 earlier in the session, its highest level since April.