Mario Monti, the European competition commissioner, in Brussels on Thursday said competition talks with Microsoft have collapsed.

In a prepared statement delivered to journalists, Monti said that despite strenuous efforts by Microsoft to meet the European Commission's concerns, a settlement of the case "has not been possible."

"Therefore we will propose next Wednesday that the Commission adopts a decision," the competition commissioner said.

Monti added that a precedent setting legal ruling is in the best interest of consumers and competition.

"We made substantial progress towards resolving the problems but were unable to agree on commitments (Microsoft must make) for future conduct," Monti said. "The public and competition would therefore be better served by a decision setting a strong legal precedent which establishes clear principles for a company that is so dominate in the market."

In response to questions, Monti said that setting a strong precedent is "of key importance." By setting a legal precedent in the current antitrust case against Microsoft, the Commission will make it easier to pursue Microsoft in future antitrust cases, he said.

The Commission is already examining a complaint by Microsoft rivals that the latest version of the Microsoft operating system, Windows XP, is abusing its dominance in the market.

"Other cases (against Microsoft) that exist or are on the horizon (and they bear) remarkable similarities to issues raised in the current antitrust case due to conclude next Wednesday," Monti said.

Other issues the Commission is investigating is how Microsoft sells its music and video playing software program Media Player and the company's current practice of bundling the program with its Windows operating system. The Commission is expected to require that the Redmond, Washington, company sell two versions of Windows to PC manufacturers: one with Media Player and one with the program stripped out.

Also under question is server interoperability. It is understood that the Commission also wants to force Microsoft to share enough secret Windows code with rivals so that they can design server software that works as smoothly with the ubiquitous operating system as Microsoft's own server software.

Microsoft's chief legal counsel, Brad Smith, said Microsoft will appeal next week's ruling, but he declined to comment on whether or not the company will ask the court to freeze the Commission's rulings until after the appeal. "Let's take one day at a time," he said in an interview shortly after Monti made his announcement.

"I believe we reached agreement on the issues of the case," said Steve Ballmer, Microsoft CEO, "but we were unable to agree on principles for new issues that could arise in the future."

"We worked very hard to try to resolve these issues without litigation," Ballmer added. "Because of the tremendous value we attach to our relations with governments all across Europe, we made every possible effort to settle the case, and I hope that perhaps we can still settle the case at a later stage."

Monti is understood to have demanded that Microsoft sign an undertaking not to abuse the dominance of Windows in future by bundling in separate software products. The wording of the declaration was intended to speed up future complaints about monopoly abuse by Microsoft.

People close to the case said that the Commission was prepared to allow Microsoft not to admit that it had abused its dominance in the past, only if it signed the legally binding undertaking.

"Such a legal undertaking could simulate the effect of a precedent-setting legal ruling," said one person who asked not to be named, adding that after making such a commitment in writing, Microsoft could be challenged on its motives for bundling other software into Windows.

"Next week's ruling could be the first of many to come," the person said.