The chips will be produced at IBM's plant in Burlington, Vermont, IBM spokesman Scott Sykes said. The terms of the agreement were not disclosed.

Mr Sykes and Analog Devices spokeswoman Maria Tagliaferro said TSMC lost the contract. But a TSMC spokesman said the world's largest supplier of made-to-order semiconductors decided in conjunction with Analog Devices not to compete for the contract. He said Analog Devices wanted services that TSMC could not provide.

The contract could be worth 'hundreds of millions of dollars', said Tony Massimini, chief of technology at market researcher Semico Research Corp.

IBM has long manufactured its own chips, but about a year ago it moved more aggressively to build up its contract chipmaking business by focusing on high-end chips and those that use the latest chipmaking technology. TSMC's business focuses more on high-volume chip manufacturing.

IBM beat TSMC three months ago for a contract to supply graphics chips for Nvidia Corp.

IBM and other manufacturers are getting more work because some chipmakers want to avoid investing in factories, which can cost US$1 billion or more, analysts have said.

IBM has unique equipment for manufacturing computer-memory chips, said Analog Devices' Ms Tagliaferro. The company will begin shipping the digital signal processor by mid-2004, she said. DSP chips are used in cell phones and handheld organisers to convert sound and light into electronic signals. Analog Devices is the fourth-largest maker of DSPs.