Judge Thomas Penfield Jackson ruled that Microsoft had violated its dominant market position and must be broken up to prevent it acting as a monopoly.

Keeping our team together is crucial for our efforts - we are confident that we will win our appeal

Bill Gates

"This is the beginning of a new chapter in this case," Mr Gates said.

"We look forward to resolving these issues through the appeals process and putting this case behind us once and for all."

The implementation of the break-up order is likely to be delayed until the higher courts reach a decision.

The US Justice Department has proposed that the appeal should go straight to the Supreme Court - which, if accepted, would significantly shorten the legal process.

The case has already lasted 10 years.

Abuse

Judge Jackson had previously ruled that Microsoft had broken anti-trust laws, abusing its dominant position in the computer operating system market.

"Microsoft, as it is presently organised and led, is unwilling to accept the notion that it broke the law," Judge Jackson said.

Judge Jackson is a cautious judge - for a cautious judge to reach this decision, it says a great deal about Microsoft's record of recent years

New York Attorney General Eliot Spitzer

The US Government charged - and the court accepted - that Microsoft had forced its customers to adopt its own browser by discounting and putting pressure on computer makers, to the detriment of rival software maker Netscape.

The judge has since admitted his reluctance to make this ruling. "Given my personal preferences, I'd much prefer to have market forces to accomplish as much as the remedy as could be done," Judge Jackson said in the Washington Post.

Microsoft argues that any break-up would reduce innovation and consumer choice.

"This ruling is unfair ... Consumers every day see lower prices and an economy full of competition," Mr Gates said. "We are confident that we will win our appeal."

So far, legal opinion is mixed as to how strong Microsoft's chances are on appeal.

"Their evidence was awful. They are guilty as sin. Their best argument is that this is just too severe," international barrister Michael MacParland told BBC Radio 4's Today programme.

The ruling has had little impact on share prices, despite earlier fears that it could prompt a slump.

Profound impact

For a cautious judge to reach this decision, it says a great deal about Microsoft's record of recent years

Eliot Spitzer

Attorney-General Janet Reno, whose department led the legal action against Microsoft, said the ruling would have a profound impact "not only by promoting competition in the software industry, but by reaffirming the importance of antitrust laws in the software era".

Attorney-General Eliot Spitzer of New York called the decision a "pretty scathing assault on Microsoft".

"For a cautious judge to reach this decision, it says a great deal about Microsoft's record of recent years."

But members of Congress from Washington state, where Microsoft has its headquarters, gave the company bipartisan support.

"This proposed break-up would not only cleave a creative team down the middle, but it would prevent those two halves from working together," said Democratic Representative Jay Inslee, whose district includes Microsoft's headquarters.

Windows and the rest

Judge Jackson said the company should be split into two separate businesses:

• One to market and produce Windows
• The other to handle Microsoft Office and other applications software, including the Internet Explorer web browser.