Microsoft Corp., already under government scrutiny over its behavior toward competitors, told manufacturers of iPod-like portable audio devices that under a new marketing program they would not be allowed to distribute rivals' music player software, but pulled back after one company protested.

The Justice Department (search) said that the incident was "unfortunate," but that government lawyers decided to drop the issue because Microsoft agreed 10 days later to change the proposal. The government disclosed details of the dispute in a federal court document made available Thursday.

The disputed proposal described in the court document as a "draft specification" would have affected portable music players that compete with Apple Computer Inc.'s wildly popular iPod (search).

The plan would have precluded manufacturers of those devices from distributing software to consumers other than Microsoft's Windows Media Player (search) in exchange for Microsoft-supplied CDs.

Legal and industry experts said Microsoft's demands probably would have violated the landmark 2002 antitrust settlement between the company and the Bush administration.

They expressed astonishment that Microsoft was not more careful, given its mandatory legal training for employees about antitrust rules and continued monitoring by the Justice Department and a federal judge over its business deals through late 2007.

"One has to be skeptical that either the internal training is not working, in which case heads ought to be rolling, or that the lessons of the case are being ignored," said Albert A. Foer, head of the Washington-based American Antitrust Institute (search), which supports more aggressive U.S. antitrust policies.

Howard University law professor Andrew Gavil (search) said he wonders whether Microsoft's proposal was a genuine mistake or signal the company intends to revert to its hardball tactics.

"It's somewhat amazing it even happened," said Gavil, who has closely followed the Microsoft case. "It's troubling that anyone inside Microsoft was still thinking this was a legitimate business strategy."

Microsoft said it recanted its proposal after lawyers reviewed it and after an unspecified industry rival complained.

"We have a legal process in place that prevents these incidents from occurring," spokeswoman Stacy Drake said.

Drake described the proposal as "only a draft description of the program we sent to manufacturers for the purpose of getting their feedback."

She said the proposal was not a contract, which is vetted by company lawyers.

The proposal, part of a campaign Microsoft called "easy start," affected one of the rare technology sectors where Microsoft is not already dominant: handheld music players and online music services. The software giant and others have struggled to match the runaway success of Apple iPod player and iTunes music service.

Microsoft wants consumers to use its media software to transfer songs onto their portable music players from Internet subscription services, such as those from Napster Inc., RealNetworks Inc. and Yahoo! Inc. Each company currently offers its own media software.

Before the disclosure of the dispute involving portable music players, U.S. District Judge Colleen Kollar-Kotelly (search) had set a hearing for this coming Wednesday to review the adequacy of the antitrust settlement. It was unclear whether she will challenge lawyers from Microsoft or the government over the music proposal.