Microsoft has lost its appeal against a landmark antirust decision by the European Commission in 2004 that the firm abused its dominant position to crush its rivals. Europe's second highest court dismissed Microsoft's appeal yesterday on all the substantive points in the case and upheld a record fine worth €497 million.

EU Competition Commissioner Neelie Kroes welcomed the ruling, which she claimed would prove a boon for consumers and lead to a "significant drop" in Microsoft's 95 per cent market share of operating system software market.

She also warned Microsoft to comply swiftly with the commission's original decision. Suggesting that new fines for the group's failure to implement the ruling may be imminent, Ms Kroes said: "I will not tolerate continued non-compliance." Microsoft said it was disappointed, but promised it would comply with EU competition law and change the way it markets its software products in future.

The eagerly-awaited judgment by the Court of First Instance is the latest chapter in a nine-year battle between the world biggest software firm and Europe's anti-trust watchdog. Microsoft has two months to lodge an appeal the ruling to the European Court of Justice, although this is restricted to points of law.

Competition lawyers said the resounding victory handed down by the court would embolden the EU executive to regulate Microsoft strictly in the future, and take an activist approach in other anti-trust cases currently under investigation in Europe.

"Its clearly a major defeat for Microsoft. There is no doubt it will spur the commission on to regulate Microsoft much more significantly," said Chris Bright, a British competition lawyer.

Ted Henneberry, former director of enforcement for the Irish Competition Authority and now practising at Heller Ehrman, said the victory would "energise the commission's efforts in this area of antitrust activity".

It may have implications for dominant firms such as Intel, Qualcomm and Google, he added.

The 250-page ruling on the appeal said the world's biggest software firm could not "bundle" new applications into its Windows operating system in a way that squeezed out rivals and harmed consumer choice.

It also upheld the commission's 2004 decision that Microsoft must provide rival makers of office servers with the technical information to enable them to make their own products work well with Windows.

The court only agreed with Microsoft on one small portion of the case, the executive's imposition of a Microsoft-funded trustee to monitor compliance with its initial ruling.

Microsoft general counsel Brad Smith described the ruling as "unprecedented" and "disappointing", adding that it gave the commission "quite broad power and quite broad discretion". But he told journalists the company would obey the court's ruling in full.

He said Microsoft had not yet decided whether to appeal.

Several industry associations, which had intervened on behalf of the commission in the case, warmly welcomed the ruling yesterday. The European Committee for Interoperable Systems, said it confirmed Microsoft had abused its near-monopoly in computer operating systems and set ground rules for the firm's behaviour.

"Microsoft can consider itself above the law no longer," said Georg Greve, president of the Free Software Foundation, which makes free software for server computers.

The court also ordered Microsoft to pay the lion's share of the costs of the commission and of business rivals.