Shares of top toy maker Mattel Inc. (MAT) and rival Hasbro Inc. (HAS) fell to their lowest levels at least 14 months on Monday after a downgrade by Lehman Brothers (search), which cited deteriorating industry conditions.

Analyst Felicia Kantor Hendrix cut Mattel's rating to underweight from overweight and Hasbro to underweight from equal weight, citing "eroding industry fundamentals."

Referring to the companies' popular toys, Hendrix said in a research note that "any strides Hasbro is making in the market place with My Little Pony (search), Transformers, and potentially VideoNow Color (search), and that Mattel is making with its new Barbie strategy, will be irrelevant until there is more clarity on the Toys R Us situation."

Last week, Toys R Us Inc. (TOY) said it may sell its toy store business, the world's second largest, in the face of competition from discounters such as Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT). The company is considering whether to build up or spin off its profitable Babies R Us retail franchise, which sells furniture and clothing.

Mattel shares slid more than 5 percent to $16.32, the lowest point in nearly two years, before trading down 19 cents, or 1.1 percent, at $17 on the New York Stock Exchange (search) Monday afternoon.

Hasbro fell 3.6 percent to $16.99, a level last seen in June 2003, before paring losses to 10 cents, or 0.57 percent, at $17.53.

Lehman did not mention LeapFrog Enterprises Inc. (LF) in its report, but the educational toy maker's shares fell to a nearly 2-year low of $16.16 on the NYSE. They were off 54 cents, or 3.11 percent, at $16.84 in the afternoon.