Microsoft suffered a decisive antitrust defeat in Europe on Monday, sending its shares down 2 percent in pre-market trade.

A European Union court backed a European Commission ruling that Microsoft, the world's largest software maker, illegally abused its market power to crush competitors.

Europe's top competition regulator said the ruling could lead to a significant drop in Microsoft's 95 percent market share.

Shares in the U.S. software giant fell before the opening bell in New York on the Luxembourg-based court's ruling. The stock was down 2.2 percent at $28.40 in pre-market trading.

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. They will find that future innovation by Microsoft will be hampered quite significantly.

The second-highest EU court dismissed the company's appeal on all substantive points of the 2004 antitrust ruling and upheld a record 497 million euro ($689.9 million) fine.

A jubilant Competition Commissioner Neelie Kroes said the EU executive now expected to see a significant drop in Microsoft's overwhelming market share.

The court said Microsoft was unjustified in tying new applications to its Windows operating system in a way that squeezed out rivals and harmed consumer choice.

The verdict may be appealed only on points of law and not of fact and may force Microsoft to change its business practices.

The ruling also gives Kroes a green light to pursue other antitrust cases and complaints involving Intel, Qualcomm and Rambus, and to issue draft new antitrust guidelines that were put on ice pending the ruling.

Microsoft must now comply fully with its legal obligations to desist from engaging in anti-competitive conduct, Kroes said in a statement.

Asked how the Commission would assess the result, she told a news conference: A market level of much less than 95 percent would be a way of measuring success ... You can't draw a line and say exactly 50 (percent) is correct, but a significant drop in market share is what we would like to see.

Her spokesman later clarified that a fall in market share would be a logical consequence of fairer competition.

DOWNBEAT

The court endorsed Commission sanctions against Microsoft's tying together of software and refusal to give rival makers of office servers information to enable their products to work smoothly with Windows. It annulled only the EU regulator's imposition of a Microsoft-funded trustee to monitor compliance.

The Court of First Instance essentially upholds the Commission's decision finding that Microsoft abused its dominant position, a court statement said.

Microsoft General Counsel Brad Smith was downbeat at the courtroom, promising the company would obey the ruling in full. He told reporters there was no decision yet on whether to appeal to the European Court of Justice.

It is clearly very important to us as a company that we comply with our obligations under European law, Smith said. We will study this decision carefully and if there additional steps we need to take in order to comply with it, we will take them.

Microsoft, which had argued that it was entitled to protect is intellectual property from rivals, has used every recourse in every case brought against it by governments and regulators.

The company has weathered a series of defeats in antitrust cases in the last decade and sees legal setbacks as almost part of its business model and a price for its near-monopoly.

Microsoft has already moved to new battlegrounds such as seeking to set technical standards across the industry, while bundling more new features into its new Vista desktop software.

Kroes declined to discuss the implications of the ruling for a pending complaint against Vista but said the Commission would have something to say soon.

Rivals welcomed the EU court decision as a signal that authorities do not intend to allow Microsoft to pursue anti-competitive practices with impunity.

The Commission ordered the company to sell a version of Windows without the Windows Media Player application used for video and music, which few have bought, and to share information allowing rivals' office servers to work smoothly with Windows.

A spokesman for Microsoft opponents, the European Committee for Interoperable Systems, said the ruling confirmed Microsoft had abused its near-monopoly in computer operating systems and set ground rules for the company's behavior.

Another winner was the Free Software Foundation, which makes free, open software for work group servers. Microsoft can consider itself above the law no longer, said Georg Greve, president of the FSF Europe.

The judges ordered Microsoft to pay the lion's share of the costs of the Commission and of business rivals.

Since the original decision, the Commission has fined Microsoft a further 280.5 million euros, saying it had failed to comply with the interoperability sanction. The EU regulator is considering a further fine for non-compliance.

(additional reporting by Georgina Prodhan in Frankfurt, Jonathan Cable in London, Mark John in Luxembourg, Sabina Zawadzki and William Schomberg in Brussels)

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