Competition Commissioner Mario Monti also insisted Microsoft must reveal secrets of its Windows software, which sits on 90% of the world's PCs.

The European Commission approved Microsoft's punishment on Wednesday.

Microsoft has already said it will appeal, kicking off a legal battle that could last years.

Mr Monti said he was confident "that we have produced here a decision that will stand before any appeal". Microsoft has a cash pile of more than $50bn, so even a fine on this scale - a record for the EU against a single firm in an antitrust case - is unlikely to hurt it commercially.

In fact, the company's shares climbed 0.6% to $24.29 in New York during early trading.

Battle lines

Industry experts say that the non-financial penalties are likely to hurt Microsoft more by opening it to further challenges and altering the regulatory environment it operates in.

Today's decision restores the conditions for fair competition   Mario Monti, EU Competition Commissioner

Microsoft must offer a stripped-down version of its Windows operating system minus the firm's MediaPlayer audiovisual software within 90 days.

Microsoft will still be allowed to sell Windows with Media Player bundled in.

Growth opportunity

Rivals including Realnetworks welcomed the move, saying that at long last the playing field had been levelled.

Dave Stewart, one of Realnetworks' lawyers, said in an interview with Reuters that the ruling probably will allow the company to increase its market share. "Manufacturers will take advantage of their freedom," Mr Stewart said. "For the first time in five years they are not going to be forced to include Windows MediaPlayer." Announcing the penalties, Mr Monti said they restored the conditions for fair competition in the software market.

"Dominant companies have a special responsibility to ensure that the way they do business doesn't prevent competition... and does not harm consumers and innovation," he said.

More transparent Windows

By setting limits on Microsoft's practice of bundling software and services with its Windows operating system, Mr Monti has struck a blow against a key part of the software firm's commercial strategy. He said the Commission would appoint a trustee to make sure Microsoft reveals "complete and accurate" software codes "and that the two versions of Windows are equivalent in terms of performance."

Mr Monti's demand for a more transparent Windows proved the sticking point in failed talks between Microsoft chief executive Steve Ballmer and Mr Monti last week. The five-year-old EU case was launched after complaints from rival makers of audiovisual software that Microsoft was protecting its own media player and squeezing out others.

Mr Monti said Brussels' decision did not break new legal ground in either Europe or the US, nor did it expropriate Microsoft's intellectual property. "Our decision is about protecting consumer choice and stimulating innovation", he told a news conference.

'Unfair'

Microsoft claims that it should not be fined at all because it did not know its behaviour would breach EU law.

Microsoft spokesman Tom Brookes said the firm believed the settlement it proposed last week, which would have let it offer rival products alongside its own, "would have been better for European consumers". The software giant said it would continue to co-operate with the EU but would seek a legal review of the Commission's decision.