(Reuters) - Demand for solar energy could shrink over an eighth this year as changes to subsidy plans in Italy will hurt module sales, Wunderlich Securities said but forecast growth over 40 percent next year on high hopes from Germany, the U.S. and China.

The brokerage cut its 2011 demand forecast to just under 16,000 MW, from 16,200 MW earlier.

"This is due to both negative growth in Germany, which is the largest consumer, and a major installation delay in Italy combined with austerity measures worldwide," Wunderlich analyst Theodore O'Neill wrote in a note.

Italy, the second-largest market for solar energy, last month approved a long-awaited decree that cuts spending on generous solar power incentives, ending a period of uncertainty which had irked international investors and weighed on shares of major global solar companies.

But demand is expected to reach 22,600 MW for 2012 as Germany shifts the focus back to solar power, following an opposition to nuclear energy, and as the United States and China push for renewable power.

"German solar subsidies were effectively cut in 2011 but are likely to increase next year as part of a strategy to invest in alternatives," analyst O'Neill said.

He said cheaper raw material -- silicon -- will mean lower costs to consumers and should boost sales. Costs will fall further as solar companies increase the efficiencies of their cells and modules.

O'Neill said buy-rated MEMC Electronic Materials, GT Solar and TechPrecision are the best bets for investors in the sector.

He also raised SunPower Corp to "hold" from "sell" as the shares are back at his price target of $16. The stock had peaked to $22.60, following French oil company Total's tender offer for 60 percent of the stock.

The WilderHill Clean Energy index has lost 15 percent of its value, year to date.

(Reporting by Krishna N Das in Bangalore)