MR Bill Gates is standing down as chief executive of Microsoft as the company he co-founded and has managed for 25 years faces the very real threat of being broken up.

The legal battle between the world's largest company and the US government is a landmark antimonopoly case. The outcome could define the corporate history of the next century, as the US courts decide whether the company abused its stranglehold over one market to gain access to the Internet.

As Mr Gates, who has been largely blamed for Microsoft's uncompromising approach during negotiations with the government, stands back from the day-to-day management of the company, the two sides seem no nearer settlement.

There is a fundamental disagreement about how to remedy the situation. The US Justice Department and the 19 states suing Microsoft are said to be increasingly leaning toward a severe "structural" remedy - breaking up the company, to make it difficult to gain control over any one business area.

Microsoft has publicly rejected any such suggestion and Mr Steve Ballmer used his first public comments as chief executive to say: "I think it would be absolutely ridiculous and irresponsible for anyone to try and break up this company." He noted the paradox of a government trying to break up Microsoft in the same week that America Online launched the world's biggest takeover bid, with its offer for Time Warner.

Although Mr Gates will remain a member of the executive team directing the negotiations, Mr Ballmer will now lead it.

The government's hand was strengthened in November, when federal judge Thomas Penfield Jackson ruled that Microsoft had abused its monopoly position to harm consumers and stifle innovation. Microsoft is to publish its official response next week.

If the mediation talks collapse, both sides will return to the federal court in Washington next month for final arguments.

Although the case is seen as a landmark in the Internet age, the legal action has its roots in an investigation by the Federal Trade Commission in 1991, years before the significance of the Internet was realised. The commission began investigating after rivals complained that Microsoft was using its stranglehold on world operating systems to shut them out of the software market.

The investigation resulted in Microsoft signing a so-called consent decree for the government in 1995. This narrowly focused document tried to stop the company using its licensing agreements to bully computer manufacturers, but two years later, the Justice Department charged Microsoft with violating the decree. The company's relationship with the regulatory authorities has been increasingly acrimonious ever since.

When Netscape, the upstart web browser company, complained to trustbusters about Microsoft, government lawyers again found it unyielding - setting the tone of legal battles that followed the decision to prosecute in 1998.

Unless Mr Gates's new job really does lead to a different stance, few observers believe the two sides will be able to reach a settlement. Both are likely to appeal against any ruling. If so, the final act of this case could still be a long way off.