Microsoft Corp will introduce a version of its Windows software aimed squarely at catching up with rivals like Apple in the red-hot tablet market, taking a step away from a long-standing alliance with chipmaker Intel.

The second-largest U.S. technology company plans to design a Windows operating system compatible with chips designed by Britain's ARM Holdings, which dominate the market for smartphones and tablet computers.

The move marks a shift from Microsoft's alliance with chipmaker Intel Corp, whose chips have been the mainstay of Windows operating systems on personal computers.

High-powered, low-battery chips made by ARM dominate the smartphone and tablet markets, featuring for instance in Apple Inc's iPhone and iPad.

Microsoft's disappearance from the phone market and its delayed response to tablet devices like the iPad weighed on its shares in 2010.

Investors want to know how the software giant intends to establish a strong presence in a tablet market that some analysts expect to double in 2011. And in smartphones, Microsoft lags rivals like Apple and Google's Android by far.

For a graphic showing tablet and smartphone market projections, please click: http://r.reuters.com/tub84r

Shares of ARM shares rose 7.7 percent on the London Stock Exchange ahead of the announcement. Microsoft shares edged 0.3 percent lower to close at $28.

(Reporting by Bill Rigby; Editing by Gary Hill)

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