Palm’s iPhone-killer, the Pre, is the one getting shot to pieces.

Sunnyvale, California, Palm in June launched its last-ditch effort to turn around the fortune of the pioneering handheld maker, backed by Elevation Partners, releasing its completely redesigned Pre phone and new webOS. The technology was the product of several years of development, raids on Apple’s engineering ranks, and hundreds of millions of dollars pumped in by private equity firm Elevation Partners.

While initial reviews were strong, sales have since faltered.

“Due to weakening demand, Pre production levels for the remainder of the year have been cut by 0.5 million units,” Collins Steward analyst Ashok Kumar wrote in a report released Wednesday.

Palm shipped roughly 300,000 Pre phones in the first two months of availability. After demand began exceeding supply, the handheld maker in July pumped up production. Unfortunately for Palm that came as demand was waning.

“Momentum appears to have already peaked,” wrote Mr. Kumar.

All this must be giving Palm a hard case of Apple envy. The Mac maker sold 1 million iPhone 3GS models in the first three days after its July 19 launch date. It's that kind of enthusiasm, or cult following, that helped Apple fatten its bottom line, boosting third-quarter net income to $1.23 billion from $1.07 billion in the year earlier.

Elevation Partners can’t be too happy either with its $425 million bet on handheld maker Palm’s resurgence.

Morgan Joseph on Wednesday downgraded Palm to sell from hold, saying sales of its Pre have “slowed significantly.” The investment banking firm said that Palm’s other phones are suffering from cannibalization due to the Pre launch. The firm expects Palm to report a first-quarter 2010 earnings-per-share net loss of $0.24 on sales of $158 million.

Palm shares were down $0.35, or 2.5 percent, at $13.20 in afternoon trading.