The European Commission has reached a preliminary decision that Microsoft broke European competition law and abused its dominant position in the personal computer market.

People close to the case said Brussels' competition department had concluded that the software company should be fined after a three-and-a-half year investigation, a sign that the chances of settling the case are rapidly running out.

The draft decision is being scrutinised by other departments, a process that could lasts months. In a non-binding step, member-states will also be consulted on the decision and the size of any fine before the 20 commissioners vote on the issue.

It is almost unheard of for the rest of the Commission to overrule findings reached by the powerful competition department.

This case is seen as one of Europe's most important antitrust struggles because of the company involved but also because of its possible effects on technology policy and US relations. The European case follows Microsoft's 2002 settlement with the US Justice Department.

The Commission has consistently called for Microsoft, headed by Mr Bill Gates, to pay a fine, unbundle its Media Player program from the rest of Windows and share more information with competitors.

The Commission is planning to complete the whole process before May 1st, when 10 new states join the European Union.

Microsoft is likely to challenge any adverse ruling at the EU's Court of First Instance in Luxembourg.

According to formal Commission charges in August, Microsoft's alleged policy of "tying" Media Player with the rest of Windows "sends signals which deter innovation in any technologies which Microsoft could conceivably take interest in and tie with Windows in the future".

Microsoft argues that Media Player is an integral part of Windows, which meets consumer demands for more functions. It has lobbied EU member-states hard and still holds out hope of a settlement with the Commission.

The company has indicated that it could give rivals more information to enable computing server systems to work together better but says competitors' demands for "full inter-operability" with Windows amount to calls to clone its products.

Microsoft's rivals say it is technically feasible to strip Media Player out of Windows. However, some of the "solutions" proposed by the Commission, such as an obligation to carry rival programs, are legally novel.