Nokia said it plans to replace 46 million batteries used in its phones that could overheat for free, but it will continue to negotiate with battery maker Matsushita over who would bear the costs.
"Nokia has identified that in very rare cases the Nokia-branded BL-5C batteries...could potentially experience overheating initiated by a short circuit while charging, causing the battery to dislodge," it said in a statement on Tuesday.
The world's top cellphone maker said about 100 such incidents had been reported globally but no serious injuries or property damage had been reported.
It said it was working closely with Matsushita Electric Industrial Co. Ltd., who made the batteries in question between December 2005 and November 2006, to investigate the problem.
Nokia said replacing millions of batteries would have some financial impact, but Matsushita would pay part of the costs. Analyst Richard Windsor of Nomura estimated the cost to Nokia at a maximum of 100 million euros ($137 million).
"Historically, when there's been a problem of this nature the supplier has had to pay," he said.
Research firm Gartner said one such battery would cost around $4.
Shares in Nokia were 0.9 percent lower at 22.42 euros by 1046 GMT, helping nudge the DJ European technology index down 0.5 percent.
Jyske Bank downgraded its rating on Nokia shares to "reduce" from "buy," saying every third Nokia user would now have to check their phone's batteries.
"I think this will hurt Nokia's brand a lot and that's the most precious asset Nokia has," Jyske analyst Soren Linde Nielsen said.
Nokia's brand is valued at $33.7 billion, according to Interbrand, making it the world's fifth most valued brand after Coca-Cola, Microsoft, IBM and GE.
The "BL-5C" is Nokia's most widely used battery, powering among others low-end 1100 series phones and multimedia handsets N70 and N91. Several suppliers have made a total of more than 300 million of them for Nokia.
Splitting the Costs
Nokia said it had issued a product advisory to consumers based on preliminary findings of an ongoing investigation.
"By reacting swiftly and responsibly, and by being fully transparent, we believe that consumers will continue to view Nokia as a responsible and trustworthy brand," Robert Andersson, head of customer and market operations at Nokia told Reuters. Matsushita said there had been a rare problem in the manufacturing process rather than in the design of the batteries. It said the effect on its earnings was uncertain.
"We are still in discussion with Nokia about how to divide the replacement cost," said Matsushita spokesman Akira Kadota. Marianne Holmlund, spokeswoman for Nokia, said in similar cases in the car industry less than half of consumers eligible for replacement had used the option.
In 2003, a Belgian consumer organisation said some Nokia batteries had a short circuit risk, but the Finnish firm denied those claims and said media reports of exploding phone batteries were all related to counterfeits.
Last year, Sony was hit by hefty costs to recall 9.6 million laptop PC batteries which could catch fire from overheating.