The European Union antitrust chief said Thursday last-ditch settlement talks with Microsoft Corp. (MSFT) had failed and he would propose that a precedent-setting ruling against the U.S. software giant be adopted next week.

"We made substantial progress toward resolving the problems that had arisen in the past but we were unable to agree on commitments for future conduct," EU Competition Commissioner Mario Monti (search) said. "It was impossible to achieve a satisfactory result in terms of setting a precedent."

Microsoft's chief counsel Brad Smith also said the talks broke down over the EU's attempt to regulate future behavior. He reiterated the company's determination to take any negative decision to court.

"We were not able to reach agreement on a formula that would solve all future questions with respect to other issues," he told reporters. "It's clear that we'll all benefit from the clarity that the courts can bring to these questions."

Monti said he would also propose a fine — expected to reach hundreds of millions of dollars — when his draft decision goes to the full European Commission (search), the EU's executive branch, on Wednesday.

After winning unanimous backing from the 15 EU governments last week, the ruling is expected to pass easily.

Microsoft is accused of unfairly grabbing market share from rival companies by "bundling" its own version of their products with Windows — the operating system in the majority of personal computers worldwide.

Microsoft says that benefits consumers, but rivals claim it's unfair competition intended to drive them out of business.

The charge was similar to the 1990s Internet browser war in the United States, where Microsoft was found guilty of using illegal means to protect its Windows monopoly. But a 2001 settlement with the Bush administration allowed it to continue integrating its Internet Explorer (search) with Windows.

Sources say the EU's draft ruling also finds Microsoft guilty of monopolistic behavior — setting a precedent in Europe — and goes beyond the U.S. remedies.

The EU is demanding that Microsoft offer computer makers in Europe a discounted version of Windows without its Media Player pre-installed, so that rivals like RealNetworks Inc.'s (RNWK) RealOne Player and Apple's QuickTime have a better shot at reaching consumers.

In addition, the draft is expected to require the company to release more underlying Windows code so rival server software companies like Sun Microsystems Inc. (SUNW) can interface as well with computers running Windows.

In exchange for a settlement, Monti was seeking commitments that could have made the impact more global and also help resolve other EU antitrust cases pending against Microsoft, sources said on condition of anonymity.

EU officials last year began investigating competitors' charges that Microsoft's latest desktop operating system, Windows XP, is designed to help extend Microsoft's dominance into new markets such as instant messaging and mobile phones.

Microsoft's next version of Windows, due in 2006, is expected to include a Web search engine and other features.

Sources said Microsoft had made a last-minute offer to include rival media programs with Windows, along with its own, to settle the case and avoid an "unbundling" order that could interfere with its business strategy.

But at a news conference, Monti said "In the end I had to ... decide what was best for competition and consumers in Europe.

"I believe competition and consumers will be better served with a decision that creates a strong precedent ... that will set clear principles for the future conduct of a company with such a strong, dominant position in the market."

Monti, however, praised the "constructive and cooperative spirit" and "high degree of professionalism" of the Microsoft negotiating team, which over the past two days included Microsoft chief executive Steve Ballmer himself.

Monti would not comment on the size of the fine he would seek. The figure will be presented on Monday to the advisory committee of national regulators for review before going to the Commission.

Microsoft could appeal to the Luxembourg-based Court of First Instance and later to the European Court of Justice — a procedure that could take several years. Microsoft could also ask the court to suspend any order to change its behavior pending a final ruling.

Antitrust experts say it's still too early to judge whether Microsoft would be granted an injunction or win on appeal.