Hopes of a last-minute settlement to Microsoft's antitrust case in Europe dimmed yesterday, after a morning meeting between competition commissioner Mario Monti and Microsoft CEO Steve Ballmer, broke up early with no apparent meeting of minds, said people close to the talks.

Monti is demanding even tougher remedies from Microsoft in return for a settlement that averts a precedent-setting negative ruling in a week, the people said.

Monti's meeting with Ballmer was brief, one person said. It followed a four-hour meeting with Microsoft's chief lawyer, Brad Smith, on Tuesday afternoon. The person added that another face-to-face meeting between Monti and Ballmer is "unlikely".

If no settlement is reached between now and next Wednesday, the European Commission is scheduled to adopt a negative ruling forcing Microsoft to offer two versions of its Windows operating system in Europe: one with Microsoft's music and video software, Media Player, stripped out of the operating system and sold separately.

The ruling will also order Microsoft to license more secret code in Windows to allow rivals to build software that works smoothly with Windows, and it will fine Microsoft between €100 million and €1 billion for having broken the European Union's antitrust laws.

Bundling issues

To waive the ruling, Monti wants Microsoft to commit not to distort competition by bundling peripheral software programs to Windows in the future.

"Such a legal undertaking could simulate the effect of a precedent-setting legal ruling," said one person, adding that after making such a commitment in writing, Microsoft could be challenged on its motives for bundling other software into Windows.

In addition to Media Player, Microsoft also bundles its Instant Messenger Service and Outlook email programs into Windows. It is also planning to bundle a search engine intended to compete with Google later this year.

Microsoft declined to comment on Monti's terms for a settlement. Spokesman Tom Brookes said efforts to reach a settlement are ongoing.

The Commission declined to comment on what Monti is seeking in a settlement. "We are on track to make an announcement next week," said Commission spokeswoman Amelia Torres, adding that negotiations with Microsoft continue.

Monti held a meeting with his team of antitrust officials yesterday afternoon informing them of the tough stance he is adopting with Microsoft ahead of next Wednesday's ruling.

One person present said the commissioner seemed confident: "The support from the advisory committee meeting on Monday meant a lot to him," the person said. Some of the national regulators attending the meeting urged Monti not to duck from setting a legal precedent, the person said. "Some of them said the ruling could be tougher. It looks like that's what Monti thinks too."

The bundling question is a major sticking point for the settlement talks. Microsoft argues that adding functions like Media Player to Windows is what computer users want and has based much of its business model around developing Windows in this way. It also argues that removing Media Player would harm Windows.

The Commission, as well as rival software makers and lawyers, argue that bundling programs such as Media Player into Windows is anticompetitive, because it puts rival music and video players such as Real Networks's RealOne Player and Apple's QuickTime at a disadvantage.

"Developers of music and video content will increasingly tailor their material only for Media Player if it remains bundled into Windows, because they can be sure that over 95 per cent of computer users will have the program on their machine," said Thomas Vinje, a competition lawyer at Clifford Chance who represents some of Microsoft's adversaries, including the Computer and Communications Industry Association.

The second strand of the Commission's case concerning interoperability is expected to be easier to remedy, but people close to the talks yesterday said this issue also remains unresolved.