Virtualization software VMware Inc is slashing prices to ward off increasing competition from billionaire Larry Ellison's aggressive technology giant Oracle Corp.

VMware said on Tuesday it will give 40-percent discounts to existing users of Virtual Iron, a software product that Oracle recently acquired. The three-month promotion includes 10-percent discounts on support contracts.

The company, which is majority-owned by EMC Corp, is offering the promotion as competition heats up in the multibillion-dollar business of selling virtualization programs, which boost the efficiency of computer servers.

While VMware controls an estimated 80 to 85 percent of that market, analysts say that No. 2 player Microsoft Corp could gain share when it upgrades its rival product within the next three weeks.

Oracle spokeswoman Deborah Hellinger declined to comment on VMware's discount program.

Virtualization software allows businesses to run multiple virtual machines on a single server, saving money on hardware, electricity, maintenance and real estate. Sales of such software have outperformed other types of computer programs over the past several years.

Oracle, the world's No. 3 software maker, introduced a niche virtualization software product in November 2007 that has not garnered much attention in the market.

It has been expanding in the hot market over the past few months with its purchase of Virtual Iron and its pending $7 billion acquisition of Sun Microsystems Inc, which has a broad portfolio of virtualization technologies.

Oracle has not said how much it paid for privately held Virtual Iron.

Shares in Redwood City-based Oracle fell more than 2 percent to $20.17, while Palo Alto, California-based VMware shares fell nearly 3 percent to $27.31.

(Reporting by Jim Finkle)

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