Wal-Mart (NYSE:WMT) played a legendary role in ravaging many toy retailers several years ago. (Remember the dire fates of FAO Schwartz and KB Toys?) Now it's all set to start another major price war on hot toys, well ahead of the coming holiday season.

The discount-retailing behemoth is cutting prices on what it calls the "Top 12 Toys of Christmas" by 10% to 50%. That should put the squeeze on rivals Target (NYSE:TGT) and Toys R Us, which each hold about 13% of the toy market, according to The Wall Street Journal.

Wal-Mart currently faces considerable adversity as it struggles to energize slowing growth and to bring more customers into the fold. It must also confront the unhappy possibility that the housing slowdown will prompt consumers to cling more tightly to their cash, particularly those in Wal-Mart's traditional customer demographic.

I've also been wondering how the recent "China syndrome" of hazardous Chinese-made toy recalls might affect Wal-Mart and its huge stake in toy sales. Given Mattel's (NYSE:MAT) repeated recalls, and pledges from companies like Disney (NYSE:DIS) and Wal-Mart to test toys' safety independently, any company with a stake in holiday toy sales is probably a little bit nervous right now. As the toy market's dominant player, Wal-Mart is probably very nervous indeed.

Wal-Mart said that more price cuts on toys are forthcoming, and I doubt anyone will be surprised if it gets increasingly aggressive in pricing other popular holiday items like electronics as well. Given a perfect storm of challenges facing Wal-Mart, its aggressive price-cutting may hurt its short-term margins for the sake of driving sales and customer traffic. But in the process, it'll also give the Bentonville behemoth's competitors a real headache.

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