NEW YORK (Reuters) - Concerns over product safety will loom large on Sunday when one of the world's largest toy fairs kicks off, after a year in which a series of high-profile recalls of China-made products hurt U.S. toy sales.

As an estimated 15,000 buyers from 7,000 retailers descend on the annual American International Toy Fair in New York over the next week, many manufacturers will spend a chunk of their time touting tighter safety measures in addition to showing off the latest toys.

That all comes at a cost and could hurt the industry's margins at a time when it will be coping with a weakening U.S. economy.

No one in the industry wants a repeat of 2007, when sales declined partly from negative publicity surrounding the recall of millions of toys due to lead paint and faulty magnets.

"It's going to be a much talked about topic," said Anita Frazier, an analyst with market research firm NPD Group. "There will be a lot of discussion about the extra protocols and the measures being taken to assure product safety."

Canadian toy maker Mega Brands (MB.TO: Quote, Profile, Research), which was stung recently by a global recall of its Magnetix toys, on Thursday unveiled a re-engineered version of the line that it renamed MagNext.

Montreal-based Mega, Canada's largest toy maker, said it teamed with London testing firm Intertek Group to craft magnetic building sets featuring embedded magnets and parts that cannot be swallowed.

A Magnetix recall began in 2006 and expanded into 2007 as one child died and 27 suffered serious intestinal injuries from swallowing small, powerful magnets. The company paid $13.5 million to settle a number of lawsuits in 2006 and has several still in litigation.

Potentially dangerous magnets and lead paint also led industry-leader Mattel Inc (MAT.N: Quote, Profile, Research) to yank millions of its toys from shelves worldwide last year.

"Toy safety is a cost of entry into this industry. And so I think that everyone always just assumed that there would be no holes," said Mega spokesman Harold Chizick.

"None of the recalls happen on purpose ... Everybody suffers from what happened last year," he said.

Earlier this week, data from NPD Group showed the negative publicity from last year's recalls helped push U.S. toy sales down 2 percent to $22.1 billion in 2007.

Meanwhile, Mattel and Hasbro Inc (HAS.N: Quote, Profile, Research) each saw some weakness in their U.S. results, despite posting better-than-expected, fourth-quarter profits.

"Obviously the industry lost a lot of consumer confidence last year," said Soren Torp Lorsen, president of Lego Americas.

"Therefore, the industry has to prove that there are very tight procedures going forward that ensure we don't disappoint again," Lorsen said.

On Saturday, the Toy Industry Association will make a new toy safety assurance proposal available to the public. The TIA said the proposal is part of a plan to formalize industry guidelines for product testing.

DOWNBEAT MOOD

It isn't only the increased costs of improving safety that has the toy industry in a downbeat mood heading into toy fair this year.

Toy makers are confronting the impact on costs of the rising price of labor and commodities, the appreciation of the Chinese currency, and higher inventories, analysts said.

The weakening U.S. economy is threatening to compound these challenges, with penny-pinching consumers less likely to buy more expensive toys this year.

"There's a lot of concern about costs -- manufacturing costs in China, even for companies doing well," said Needham & Co analyst Sean McGowan. "There's a lot of concern about how much worse the U.S. economy will get."

Toy executives seem more concerned about the rising cost of doing business in China -- where most U.S. toys are made -- than the growing struggles of American consumers, BMO Capital Markets analyst Gerrick Johnson said in a February 13 research note.

"We anticipate that gross margin expansion -- particularly if sales volumes are disappointing -- could be very hard to come by in the coming year."

(Reporting by Justin Grant, editing by Leslie Gevirtz)

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