Tuesday's settlement also ended a five-year licence agreement struck in 1996, which was due to expire in two months.

Legal tangles

The settlement comes just as Microsoft is set to go into the second round of its long-running legal battle with US authorities.

The Department of Justice and several US states allege that Microsoft broke anti-trust laws, and abused its near-monopoly on software for PC operating systems.

In April 2000 a judge had found Microsoft guilty of breaking US competition laws, and several months later ruled that the company should be split in two. The case has now reached the appeals stage.

During the trial, prosecutors alleged that Sun Microsystems was one of the companies suffering under Microsoft's behaviour.

Justice Department officials presented evidence showing that Mr Gates had internal discussions about a need to "undermine" Sun because of what it was doing in Java.

Despite this, Scott McNeally, chief executive at Sun Microsystems, said a break-up of Microsoft was the last thing he wanted.

"It's pretty simple. This is a victory for our licencees and consumers", said Nealy in a written statement.

Microsoft also claimed victory, saying a continued court battle would have been costly for both companies.

A contentious rivalry

At the heart of the disagreement was Sun's contention that Microsoft altered the Java language.

Sun designed Java using "open standards", permitting all kinds of computers to run Java applications, regardless of which operating system they run.

It's pretty simple. This is a victory for our licencees and consumers

Sun Microsystems Chairman Scott Nealy

In 1997, Sun noticed that Microsoft was adding proprietary extensions to Java programs, which prevented computers from running Java programs on computers other than those operating on Microsoft's dominant Windows software.

Sun sued. But before the case could draw much media attention, the US government stepped in with its own lawsuit against Microsoft, alleging antitrust activities.

Sun's case against Microsoft never went to trial. But in Tuesday's settlement it retained rights to bring its own antitrust claims against Microsoft, including those covered by the agreement.