European regulators have ruled that Microsoft broke antitrust law and have fined the company a record £331m.
The European Commission also ordered Microsoft to offer a version of its Windows operating system without Windows Media Player within 90 days.
Microsoft was told to disclose enough material to rival makers of workgroup servers so that they can ensure their products have full interoperability with Windows PCs and servers. The commission gave Microsoft 120 days to fulfil this condition.
"Today’s decision restores the conditions for fair competition in the market concerned and establishes clear principles for the future conduct of the company with such a strong dominant position," said commissioner Mario Monti.
Last-ditch talks to agree a settlement between Monti and Microsoft chief executive Steve Ballmer broke down last week.
"We worked hard to reach an agreement that would address the European Commission's concerns and still allow us to innovate and improve our products for consumers," Ballmer said today.
"We respect the commission's authority, but we believe that our settlement offer from last week would have offered far more choices and benefits to consumers."
Microsoft will now seek a legal review of the commission's ruling in the Court of First Instance in Luxembourg, said Brad Smith, the company's senior vice president and general counsel.
The appeal process could drag on for years.
"Today's ruling is not surprising to us," said Neil Ward-Dutton at Ovum Group. "Even if it were to come into force [Microsoft will appeal immediately, which will drag the process on for years], it would be very unlikely to have a material effect on Microsoft's business."
Analysts believed that Microsoft would not suffer unduly from having to unbundle Windows Media Player.
"As PCs become just another device in the digital home, consumers won't care about what's under the hood ... This ruling represents at best an annoyance to Microsoft, not a genuine barrier - even for Longhorn," said Paul Jackson at Forrester.
"From a Windows Media perspective, Microsoft is two steps ahead of this ruling. It has already made big strides in ensuring that the Windows Media format, and the associated server products and creation tools, are widely adopted by content and server providers," said Ward-Dutton.
"If it really wanted to deal with the Windows Media issue, the commission should have focused on server APIs, codecs and protocols rather than concentrating on the desktop domain."
RealNetworks deputy general counsel Dave Stewart welcomed the ruling. "Certainly it has not come too late. We did expect that PC original equipment manufacturers will take advantage of their new-found freedom. For the first time in five years they are not going to be forced to include Windows Media Player."
EU Microsoft ruling could have greater effect than in US, say observers >>