WASHINGTON -- In a dramatic shift, the Bush administration on Thursday abandoned the Clinton-era effort to break up Microsoft. It suggested a lesser antitrust penalty that could still force changes to the company's new Windows operating system.
The Justice Department also dropped charges that the software giant illegally hurt competitors by tying or bundling separate features, like a Web browser, to its flagship computer operating system.
Microsoft had hotly contested those charges because the company's strategy calls for integrating more new features into products like the new Windows XP operating system, due in stores next month.
Officials said the legal shift was not an overture to Microsoft to settle. They suggested the government will ask the new judge handling the antitrust case to review the Windows XP software and seek a penalty that ensures the company doesn't operate as an illegal monopoly in the future.
But the news that reverberated from Wall Street to Silicon Valley was the decision to stop trying to break up an American corporate icon that helped fuel the technology revolution of the 1990s.
The 19 states that joined the government in suing Microsoft and seeking its breakup acquiesced, saying an appeals court decision earlier this summer would make a breakup more difficult to pursue.
"This is an industry that moves incredibly fast," said Iowa Attorney General Tom Miller. "The case has gone on for quite some time now. It was time to move as quickly as we could to remedy."
Microsoft reacted with cautious optimism. "We remain committed to resolving the remaining issues in the case," spokesman Vivek Varma said.
Investors, however, showed some concern that the penalties the Bush administration will seek might still affect or delay next month's planned debut of Windows XP -- which many on Wall Street hope will help invigorate the sluggish technology industry.
Microsoft shares finished the day down $1.72 at $56.02 per share.
Justice said it made the about-face to streamline the case and bring it to an end as quickly as possible. The goal, it said, was to "obtain prompt, effective and certain relief for consumers."
The department said it would still seek a penalty that would open the operating system market to competition.
To that end, the government proposed a penalty similar to some interim penalties imposed by the original trial judge, U.S. District Judge Thomas Penfield Jackson.
Those would, among other things, stop Microsoft from making certain exclusive deals with partners, force computer manufacturers to keep specific icons and programs on the Windows computer desktop, and give other companies more access to Windows blueprints.
Howard University law professor Andy Gavil said such restrictions could affect Windows XP, which has been completed by programmers but won't reach stores until October.
One of Microsoft's chief rivals said it was happy the government plans to focus on the new systems.
"What's clear today is that the Department of Justice is prepared to take a hard look at Windows XP and will pursue a quickly imposed remedy to open up competition on the desktop," AOL Time Warner executive John Buckley said.
President Bush, who during last year's campaign expressed concern that Microsoft might be ruined by the antitrust case, made no direct comment on the legal strategy change. He said of the case, "I expect the Justice Department to handle that in a way that brings honor and thought to the process."
White House and Justice officials said Bush had brought no pressure to bear on the decision.
The top Democrat on the House Judiciary Committee, however, sharply criticized the decision and demanded records of any contacts between the White House and Justice Department on the case.
Microsoft is a top contributor to the Republican Party, and company executives have been frequent guests at the White House.
District Judge Colleen Kollar-Kotelly took over the case after a federal appeals court earlier this summer reversed Jackson's ruling breaking Microsoft in two and disqualified him from further proceedings because he made pejorative comments about the software giant while presiding.