* Q3 revenue $323 mln vs $335 mln forecast
* Sees Q4 revenue around $340 mln vs $364.5 mln forecast
* Shares fall 16.4 pct in Tel Aviv (Adds CEO comments from interview, background)
By Tova Cohen
TEL AVIV, Oct 29 (Reuters) - TowerJazz revenues will miss expectations in the fourth quarter after falling in the previous three months, the Israeli chip manufacturer said on Monday, citing weakness in the market and a switch to higher-margin products.
The news sent TowerJazz shares tumbling, with the Tel Aviv-listed stock down 16.4 percent at midday. That made it the biggest faller on the main TA-125 index, which rose 0.8 percent.
The company, which specialises in analogue chips used in cars, medical sensors and power management, reported diluted earnings per share of 37 cents excluding one-time items in the third quarter, down from 59 cents a year earlier. Revenue fell to $323 million from $355 million.
It was forecast to earn adjusted EPS of 40 cents on revenue of $335 million, according to I/B/E/S data from Refinitiv.
It now expects fourth-quarter revenue to come in at 5 percent above or below $340 million, having said in July it was targeting revenue in the period of $360-$380 million.
Analysts forecast revenue of $364.5 million in the fourth quarter.
"The present overall market softness has had a recent notable impact across our business units, with a fourth-quarter revenue roll-up lower than previous expectations," Chief Executive Russell Ellwanger said.
He said while none of his customers had specifically cited the trade war between the United States and China as the reason for the market weakness, "anytime, I think, that you have a type of fear people are more risk averse".
"If everyone is positive and happy, people are more willing to take on the risk of inventory," Ellwanger told Reuters.
TowerJazz began the year deciding to focus on profitability rather than use valuable capacity for lower-margin businesses, he said. This has hurt 2018 revenue more than expected, though the company has built a higher value mix of products.
"We expect to see fourth-quarter margins increase as a result of this much richer product mix," Ellwanger said.
The company cut its debt by $98 million, including the early repayment of $40 million borrowed in 2016 to buy its San Antonio plant from Maxim. This has saved $7 million in annual financing expenses.
"The actions we've done put us in a good position to execute on opportunities that happen when there's a pullback," Ellwanger said.
Opportunities could include acquiring assets, as Tower did during the global financial crisis in 2008 when it bought California-based Jazz, as well as winning new customers and making deals, he added. (Reporting by Tova Cohen; Editing by Jan Harvey)