(Adds executive comments, shares in paragraphs 6-10)

By Daniel Leussink

TOKYO, Feb 3 (Reuters) - Japan's Denso Corp, a leading supplier to Toyota Motor Corp, on Friday slashed its annual operating profit forecast by 12.5%, missing analysts' estimates, as it warned a chip shortage could cause auto production cuts.

The company, a major manufacturer of automotive parts and chips, lowered its full-year operating profit forecast to 420 billion yen ($3.26 billion) for the year to end-March, from 480 billion yen expected previously.

Denso said the new forecast took into account the pandemic's impact in China and the risk of vehicle production cuts due to the ongoing global semiconductor shortage, despite efforts being taken to reduce costs.

The downward revision comes after the world's top-selling auto maker Toyota in November lowered its vehicle production forecast for the current financial year through March to 9.2 million vehicles from 9.7 million amid the chip shortage.

Denso, which specialises in systems for running gasoline engines and driving hybrid and battery electric vehicles, gets about half of its revenue from the Toyota group, which also includes Toyota truck unit Hino Motors and small-car maker Daihatsu.

Denso's revised profit forecast reflected slowing sales in China and Japan, which are relatively profitable markets for the company, executive Yasushi Matsui told reporters during an earnings briefing.

In China, Denso has also faced production difficulties because of the rapid spread of COVID-19 as well as supply chain issues that are also affecting auto makers, Matsui said.

The company's production in China is only at 40% of original projections and it not expected to make a full recovery any time soon, he added.

Denso's new forecast would still mark a record operating profit, Matsui said, but it was lower than a 474.21 billion yen average forecast by 20 analysts, according to Refinitiv data.

The company's shares rose 1.5% to 7,084 yen in afternoon trade, recovering after an initial sell-off following the earnings release and outperforming the Nikkei index, which was little changed.

Denso, which counts outgoing Toyota President Akio Toyoda as a board member, posted an operating profit of 112.5 billion yen for the three months to Dec. 31, versus an average 125.71 billion yen profit estimated by 10 analysts.

A year earlier, it earned 96.9 billion yen in the third quarter. ($1 = 128.6600 yen) (Reporting by Daniel Leussink; Editing by Muralikumar Anantharaman and Jamie Freed)