The European Commission said Microsoft must act within four months to give competitors in audio-visual software and servers used in millions of offices in Europe a fairer chance to compete "because the illegal behaviour is still going on".
"We are simply assuring that anyone who develops new software has a fair opportunity to compete in the marketplace," said EU Competition Commissioner Mario Monti.
More important than the fine were orders to Microsoft to unbundle Windows Media Player within 90 days and give "complete and accurate" information to rival makers of computer servers within 120 days, Monti added.
Microsoft General Counsel Brad Smith called the decision unfortunate. He said the firm would appeal against the ruling in court and seek a suspension of the order that Microsoft sell a version of Windows without Windows Media Player.
"Today's decision is a setback not only for Microsoft but for our entire industry and consumers," he said, adding it would freeze technology and damage innovation.
"At the end of the day the European Commission has the first word, the European courts have the final word and the final word is going to carry the day," Smith said.
Two European court decisions have gone against Monti in recent years, but he emphasised that every aspect of this ruling was meticulously vetted by lawyers.
Monti said he was striking a blow for consumers against a "virtual monopoly" that is violating the law.
"We are not expropriating Microsoft's intellectual property, we are also not breaking new legal ground, neither for Europe nor for the United States," Monti told reporters.
At this point Microsoft's main weapon is delay.
Microsoft's main weapon now is
said to be delay
Microsoft's Smith said he was "very optimistic" the court would suspend EU remedies and argued the deal proposed by the firm would have been a better outcome for consumers.
Settlement talks collapsed last week because the two sides were unable to agree on commitments about Microsoft's future business practices. Smith said the company had offered to include three rival media players in Windows.
"Instead of getting immediate action in 2004 we are now on a path to get a result in 2009," he said, expecting a legal fight.
"We believe we have excellent arguments about how this would cause consumer confusion and disrupt the industry," he added.
Monti said it was important to have a decision that would make it easier and quicker to act on future complaints.
The commission is already looking into two other complaints, one by the Computer and Communications Industry Association.
Association president Ed Black applauded the ruling and said it was needed to stop Microsoft from dominating home entertainment centres as they converge with computers.
Monti said the decision gave manufacturers freedom to choose which software they installed in personal computers to play films and music, and did not mean consumers would get PCs and operating systems without a media player.
The EU says its decision gives
consumers greater choice
The commission ruled that Microsoft bundled its own audiovisual player to damage such rivals as RealNetworks RealPlayer and Apple Computer Quicktime.
RealNetworks' Deputy General Counsel, Dave Stewart, whose firm has lost market share to Microsoft, told Reuters the move was not too late as "for the first time in five years [PC makers] are not going to be forced to include Windows Media Player".
The commission will appoint a special monitoring trustee to ensure Microsoft has two versions of Windows that work equally well and that information given to rivals is complete.
The ruling bars Microsoft from circumventing it by offering discounts to computer makers which install the version of Windows with Media Player.
"Today's decision is a setback not only for Microsoft but for our entire industry and consumers"
general counsel, Microsoft
The decision to go for a broad remedy follows a decade of investigations and settlements on narrow issues without any formal findings against the software firm.
A US appeals court ruled unanimously in a final 2001 decision that Microsoft broke antitrust rules, but critics say the remedies there failed to encourage vigorous competition.
Microsoft's Smith suggested the EU should not be meddling with a US company when US regulators had dealt with it.