A US court yesterday reversed a lower court order that would have split software giant Microsoft in two. The federal Circuit Court of Appeals in the District of Columbia found that the Seattle-based company violated antitrust laws, but that the trial judge engaged in "serious judicial misconduct" by making derogatory comments about its behaviour.

The seven-member court ordered that a new judge should decide what penalty the company should face for having behaved "anti-competitively", and for taking actions that "contributed to the maintenance of its monopoly power". It is thought unlikely that another break-up ruling will result, as the judges reversed the finding that Microsoft's packaging of its Windows operating system with its Internet Explorer violated antitrust laws.

Microsoft said yesterday that the ruling narrowed the case against the company and praised the decision as one favouring freedom of companies to innovate. Mr Kevin Dillon, managing director of Microsoft's European Operations Centre in Dublin, said the company was open to talks to resolve the remaining issues from the decision.

"On the whole we feel the original decision was harsh and unfair," he said. "We had no plans for a break-up of the company. It is business as usual in Ireland," he added.

The decision is an embarrassing rebuff for District Judge Thomas Penfield Jackson, who made the original ruling that Microsoft illegally tied its Internet browser to the Windows operating system to maintain its monopoly and should be split up.

It is a major setback for the US Justice Department and 19 US states, which sued Microsoft for allegedly breaking the law in stifling competition. They now face several options, including settlement talks, an appeal to the Supreme Court, or a request for stiff penalties against Microsoft from the new judge.

The appeals court concluded that Judge Jackson gave the appearance of bias against Microsoft in making inappropriate comments to the news media outside the courtroom. Among his comments, Judge Jackson compared Microsoft founder Mr Bill Gates to Napoleon and Microsoft to a drug-dealing street gang.

After the news broke in midmorning, Microsoft shares that had fallen 89 US cents to $70.25 suddenly surged $3.82 on the day to $74.96 before they were halted in late morning trading on the Nasdaq.

The Microsoft case, filed in May 1998, was the biggest antitrust action in the US since the Government forced AT&T to relinquish its monopoly and be broken up into regional telephone companies in 1984.

The Justice Department alleged that Microsoft pushed Netscape's competing browser out of the marketplace and bullied computer makers into ceding control of the computer's desktop.

After 78 days of a trial, Judge Jackson found on June 7th last year that Microsoft had illegally used its monopoly power in the market for personal computer operating systems, by integrating its Web browser into Windows and refusing to offer it separately. From 1996 to 1999 Microsoft increased its share of the browser market from 2 to 64 per cent.