Oracle's CEO Larry Ellison will give evidence

The revelation came as Oracle defended its own planned takeover of rival Peoplesoft against objections from US competition watchdogs.

The mooted Microsoft-SAP tie-up, now abandoned, demonstrates that the software market could withstand large-scale mergers, Oracle's lawyers argued.

Microsoft and SAP confirmed that they did hold exploratory last year.

The software giant said it had "initiated preliminary discussions with SAP to explore the possibility of a merger between the two companies."

It added that it had ended the talks "due to the complexity of the potential transaction," and had no intention to resume them.

Big Three

The revelation came on the first day of a court hearing into the US Department of Justice's attempt to block Oracle's long-running bid to buy smaller rival Peoplesoft.

The Justice Department told the court that the Oracle-Peoplesoft merger would eliminate one of only three big suppliers of auditing and human resources software in the US, hampering competition.

"If you take Peoplesoft out of the picture, Oracle's ability to raise prices will be enhanced," DoJ lawyer Claude Scott said.

But Oracle said Microsoft's planned takeover of Germany's SAP showed that the DoJ had underestimated the intensity of competition in the software industry.

SAP is the world's biggest supplier of business software, outranking both Oracle and Peoplesoft in that particular segment of the software market.

Oracle said the DoJ's definition of the business software market was too narrow, and did not take account of emerging competitive threats from Microsoft and numerous smaller suppliers.

The Microsoft-SAP revelations are the latest twist in Oracle's year-old attempt to acquire Peoplesoft, now ranked as one of the most bitterly fought takeover battles of recent years.

Peoplesoft, a specialist in human resources software, has fiercely resisted Oracle's advances, rejecting its latest $7.7bn offer as "inadequate."

Peoplesoft's stance is supported by many of its staff, some of whom have set up a website promoting the benefits of keeping the firm independent.

The outcome of the trial will be watched with interest in the European Union, where regulators have listed a number of objections to the Oracle-Peoplesoft merger.