Risking another trans-Atlantic tussle over Microsoft Corp. (MSFT), European Union antitrust regulators said Wednesday they were investigating whether the software giant's deal with media conglomerate Time Warner Inc. (TWX) to develop anti-piracy software might lead to a new monopoly.

Microsoft — already fighting to overturn last March's EU ruling that it abused its dominant position with the Windows operating systems — and Time Warner both said they were "fully cooperating" with the EU probe after initial efforts to head it off fell short.

"We understand that this is a complex area," Microsoft spokesman Dirk Delmartino said.

In opening the in-depth probe, the European Commission (search) said it was worried about Microsoft's ability to "tip" burgeoning demand for so-called "digital rights management" in its favor, turning what is already a "leading position" in that market into a dominant one.

That echoes controversial charges the EU made in March, when it ordered Microsoft to remove its Media Player program from Windows to prevent that segment of the market from "tipping" to a Microsoft monopoly.

Microsoft, based on Redmond, Wash., is the world's largest software provider.

The current deal concerns ContentGuard Inc. (search), a Bethesda, Md.-based company that develops technology for digital rights management (search), or DRM, to protect films, books, music, video games and other media distributed on the Internet from illegal use or copying.

Such software enables legal download services like Apple Computer Inc.'s (AAPL) iTunes music store to ensure proper royalties are collected, and also is expected to be increasingly used in the corporate world for the secure online exchange of documents and e-mails.

With revenues expected to climb, "companies like Microsoft and Time Warner see DRM as a ripening plum they are anxious to pick," said Joe Wilcox, senior analyst with JupiterResearch in Maryland.

Last April, Time Warner joined Microsoft, an existing investor, to buy most of Xerox Corp.'s (XRX) ownership in ContentGuard. No figures were released but Xerox, which retains a small equity stake, reported earnings of $83 million from the sale.

The companies said at the time they hoped to develop "new standards and technologies" along with partners like Japanese giant Sony Corp (SNE). But they also face industry pressure to make any Microsoft-backed standards compatible with as many devices and online stores as possible.

Dario Betti, senior analyst with the Ovum consultancy in London, said rivals have complained about the possibility of Microsoft pushing unfair licensing terms or undermining interoperability.

"This is not surprising — the industry distrusts Microsoft and remembers its past predatory strategies," he said by e-mail.

But he added that he believes the digital rights market is still healthy enough to prevent such scenarios.

Wilcox noted Microsoft is "one of several" companies offering rights protection for documents, while Apple is the "clear leader" in music and video distribution is still in its infancy.

"While Microsoft is a DRM early leader, I wouldn't say the company is dominant," he said in an online interview.

The EU, however, said it worried the new firm "may have both the incentives and the ability to use its (copyrights) to put Microsoft's rivals ... at a competitive disadvantage ... (and) could also slow the development of open interoperability standards."

It delayed Wednesday's decision by 10 days to review concessions offered by the companies, but EU spokeswoman Amelia Torres said "the commission's concerns were not entirely addressed."

A new deadline of Jan. 6 was set for a decision.

The EU could still decide to clear the deal, but the opening of a relatively rare, phase two investigation indicates serious reservations.

It also could add to tensions with Washington over antitrust policy, with U.S. critics accusing the EU of undermining global business.

No antitrust review was required in Washington on this deal because it didn't cross the jurisdictional threshold. But a negative decision in the EU could scuttle it anyway, as happened in 2001 when the EU blocked General Electric Co.'s attempt to merge with Honeywell.

Companies doing business in Europe have to comply with EU law, and Torres said the deal did meet the threshold for EU review. That requires total worldwide sales for the companies involved of at least 5 billion euros ($6 billion), and at least 250 million euros ($300 million) of that within the 25-nation bloc.

Microsoft already is under close scrutiny by European regulators.

In March, the EU slapped it with a record fine of 497 million euros ($596 million) for monopoly abuses, including the Media Player issue. Microsoft has appealed at a European court to overturn the fine and requirements to change the way it sells Windows.

New York-based Time Warner has also clashed with Brussels, winning approval in 2000 of its merger with the leading Internet service America Online only after agreeing to abandon its purchase of the London-based EMI record label.

Microsoft shares were up 2 cents at $27.26 on the Nasdaq Stock Market while Time Warner shares were up 9 cents at $16.57 on the New York Stock Exchange