HELSINKI (Reuters) - The world's top cellphone maker Nokia said on Monday it would start to make laptops, entering a fiercely competitive, but fast-growing market.

Nokia has seen its profit margins drop over the last quarters as handset demand has slumped, and analysts have worried that entering the PC industry, where margins are traditionally razor-thin, could hurt Nokia's profits further.

"We are fully aware what has the margin level been in the PC world. We have gone into this with our eyes wide open," Kai Oistamo, the head of Nokia's key phone unit, told Reuters.

Its first netbook, the Nokia Booklet 3G, will use Microsoft's Windows software and Intel's Atom processor -- offering up to 12 hours of battery life, and weighing 1.25 kilograms. Netbooks are low-cost laptops optimized for surfing the Internet and performing other basic applications. Pioneered by Asustek in 2007, other brands such as HP and Dell have also pushed out their own lines since then.

Research firm IDC expects netbook shipments this year to grow more than 127 percent from 2008 to over 26 million units, outperforming the overall PC market that is expected to remain flat and a phone market which is shrinking some 10 percent.

"Nokia will be hoping that its brand and knowledge of cellular channels will play to its strengths as it addresses this crowded, cut-throat segment," said Ben Wood, director of research at CCS Insight.

"At present we see Nokia's foray into the netbook market as a niche exercise in the context of its broader business."

Nokia said it would unveil detailed specifications, market availability and pricing of the device on Sept 2.

A source close to Nokia said the new netbook would use the upcoming Windows 7 operating system. Microsoft says a stripped-down version of Windows 7 will be introduced to netbooks the same time as its general release on October 22

(Additional reporting by Kelvin Soh in Taipei; Editing by Rupert Winchester)