TOKYO (AFP) - Sony's board is likely to reject a US hedge fund's proposal to spin off part of its profitable entertainment arm, a report said on Thursday.

Japan's leading Nikkei business daily said the company's directors discussed the idea on Wednesday and were leaning towards turning the proposal down after reviewing a financial advisor report on the deal.

Some directors argued that Sony can compete better as a whole firm instead of hiving off part of the entertainment division, the Nikkei said without citing sources.

Sony's chief financial officer Masaru Kato on Thursday called the proposal "a very important issue for our board" but declined to elaborate on the status of discussions.

"We want to spend time and study it," he told reporters, after the firm said it had swung to a US$35 million (S$45 million) net profit in the three months to June. "But we would like to refrain from discussing it publicly." US billionaire Daniel Loeb, who says his hedge fund Third Point has amassed the largest stake in Sony, called on the firm's executives to spin off up to 20 per cent of the entertainment unit, which includes a music label and Hollywood movie studio.

Loeb, known for his aggressive style in stoking change at target firms, initially took a softer approach by praising Sony chief Kazuo Hirai's bid to turn the company around after years of losses.

The billionaire's polite letters to Sony's chief were widely seen as catering to Japan's corporate culture, where vocal shareholder activism is rare.

"But it's not a favourable time for Third Point as Sony appears to be on track to a recovery," said Dan Matsuda, a corporate lawyer at Jones Day in Tokyo.