Against expectations for a split judgement, judges at the European Court of First Instance, the EU's second-highest tribunal, upheld most of the European Commission's ruling against the US company.
Microsoft general counsel Brad Smith said the company would "study" the ruling before deciding to appeal, but would take "additional steps" to comply with the decision.
"We'll study this decision carefully, and if there are additional steps that we need to take to comply with it, we will take them," a visibly-shaken Smith told reporters after the decision was delivered.
The ruling, which Microsoft has two months and 10 days to appeal against, left Microsoft's opponents and the European Commission jubilant, describing it as a victory for consumers and innovation.
"This judgement confirms the objectivity and the credibility of the Commission's competition policy," Commission president Jose Manuel Barroso said.
"This policy protects the European consumer interest, and ensures fair competition between businesses."
The tribunal confirmed the Commission's 2004 antitrust finding that Microsoft had used its ubiquitous Windows personal-computer (PC) operating system to crush rivals in other linked markets.
"Microsoft cannot abuse its Windows monopoly to exclude competitors in other markets," EU Competition commissioner Neelie Kroes said.
The verdict dealt a painful blow to Microsoft's business strategy, which has seen it become one of the biggest-and-most profitable enterprises in the world.
Microsoft lost on all the major points of the case, winning only a minor victory on the technical issue of the independent trustee who was appointed to oversee the company's implementation of Commission ruling.
Billed as one of the biggest EU court judgements ever, the verdict holds huge stakes for Microsoft, and for Europe's capacity to regulate corporate giants from all over the world.
The court upheld the record €497-million fine that Europe's chief regulator also slapped on Microsoft, although this would appear a drop in the ocean for the powerful software giant.
While Microsoft emerged in 2002 from a similar case in the United States relatively unscathed, EU regulators have taken a much harder line toward the company than their US counterparts.
The EU case goes back to March 2004, when the Commission ruled, after a five-year probe, that Microsoft had abused its share of the market for operating-systems-running personal computers, thanks to its Windows program.
In particular, it accused Microsoft of using its stranglehold on PC operating systems to elbow rivals out of the more competitive markets for media players, which play music and videos, and operating systems running back-office servers.
The Commission ordered Microsoft to sell a version of Windows PC without a media player already bundled in, and to share technical information with rivals needed to make products that could function with Windows.
Microsoft has fought back at every chance, arguing that customers prefer Windows to include a media player, and that the Commission wants it to turn over valuable trade secrets often protected by patents and copyright to competitors.
While the court considered the case, the battle between Microsoft and the Commission has rumbled on, with EU regulators consistently turning up the pressure on the company to comply with its demands.
Brussels fined Microsoft a further €280 million in July 2006, after finding that it was not respecting its original ruling, and the company faces further penalties that could bring the total well past €1 billion.
However, the Commission has been waiting to see whether the court would back its original ruling before pushing ahead with further action against Microsoft.
© 2007 Agence France-Presse
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