Microsoft Corp's chief financial officer forecast at least another year of tough trading in all areas on Thursday, as the economy shows no immediate sign of recovery.

At the same time, the world's largest software company confirmed that it had cut the rate it pays agencies supplying temporary office workers by 10 percent, as it looks to trim costs as demand wanes for its applications and devices.

A contraction of some substance is the way that we are thinking about it, said Microsoft Chief Financial Officer Christopher Liddell at a Goldman Sachs technology conference in San Francisco, which was broadcast on the Internet.

How long the contraction's going to be and how deep none of us know, he added. Despite what politicians and others are saying, it's probably for the next year or two that we're going to see a difficult trading environment.

Separately, Microsoft confirmed that it had cut rates paid to agencies supplying temporary office staff, saying it was part of a broad cost-cutting plan announced in January, which included slashing 5,000 staff over the next 18 months.

The move was motivated by the need to achieve greater cost reductions, a Microsoft spokesman said, adding that the cuts did not affect more skilled contract workers such as programmers.

The Redmond, Washington-based company, which employs about 95,000 people, does not break out numbers of temporary or contract workers and did not say how much the move would save.

At the Goldman Sachs conference, Liddell also said that the roll-out of its new Windows 7 operating system might help personal computer sales rebound next year.

We might see a bump (in PC sales) next year, just as a result of lower demand this year, said Liddell, who expects some users will delay buying a new computer to wait for Windows 7, expected early next year. It will be helpful, but it will not outweigh the general macro-economics.

Liddell was neutral on the prospects for a deal with Yahoo Inc over its rival's Internet search business, which the executives of both companies appeared to be warming to in comments made this week.

We have to have a plan that excludes Yahoo, we can't be dependent on that, said Liddell. Even though we've suggested it would be great to get together, we don't work on the basis that's going to happen. If it does that's great, but if it doesn't, that's fine too.

Yahoo rebuffed a $47.5 billion acquisition bid from Microsoft last year, and saw a deal to form a search advertising partnership with Google Inc fall apart amid antitrust concerns.

Microsoft's shares closed down 3.2 percent at $16.42 on Nasdaq.

(Reporting by Bill Rigby)

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