It’s admittedly the worst nightmare for Intel, the world’s leading silicon maker which on Monday said it discovered a design flaw in Sandy Bridge chipset.

The news couldn’t have come at worse times for Intel which at the CES show earlier this month unveiled Sandy Bridge processors for notebooks and desktops with great fanfare (review).

The new processors are a game-changer for the company as they combine advanced integrated processor graphics built around the HD 2000 and HD 3000, the CPU, the memory controller and other functions on a single piece of silicon. Such an architecture results in a speedier performance, lower power consumption, dynamic clocking and yields other enhancements.

The flaw was discovered in a a recently released support chip and a silicon fix is being implemented, the company wrote in a statement:

Intel Corporation has discovered a design issue in a recently released support chip, the Intel 6 Series, code-named Cougar Point, and has implemented a silicon fix. In some cases, the Serial-ATA (SATA) ports within the chipsets may degrade over time, potentially impacting the performance or functionality of SATA-linked devices such as hard disk drives and DVD-drives.

The chipset is utilized in PCs with Intel’s latest Second Generation Intel Core processors, code-named Sandy Bridge. Intel has stopped shipment of the affected support chip from its factories. Intel has corrected the design issue, and has begun manufacturing a new version of the support chip which will resolve the issue. The Sandy Bridge microprocessor is unaffected and no other products are affected by this issue.

The updated chipset will being shipping in late February and full volume recovery is expected in April, Intel noted. This setback will cost the company a whopping $1 billion in the combined lost revenue ($300 million) and replacement costs ($700 million) because of a production delay. Although the flaw affects only a small portion of customers who bought 2011 Core i5 and Core i7 quad-core Sandy Bridge systems that have been shipping since January 9, its repercussions will be felt in the entire computer industry.

More than 500 vendors that have announced or begun selling computers that utilize the new chipset will suffer a financial loss stemming from the delay. Worse, the industry may now turn to AMD which supplies a similar integrated solution under the Fusion moniker. Trading in Intel halted on the New York Stock Exchange, where the company shares can be found under the INTC symbol.

Intel recently settled a licensing dispute with Intel for $1.5 billion and said it would invest $3.2 billion in new chip factories in Ireland and Israel. In addition, their boss Paul Otellini was drumming up new chips for smartphones that will run Microsoft’s upcoming Windows 8 software said to sport a unified kernel. Earlier this month, the company reported strong fourth quarter earnings that jumped 48 percent on an 8.4 percent revenue increase. It was unclear at press time how those investments would pan out with this unfortunate setback and unexpected costs it had incurred.

Source: Intel