The European Commission "made fundamental errors of fact and reasoning" in fining Microsoft €497 million (£344m) for a "failure to offer a product that nobody wants," the software company said today.

The accusation came as Microsoft launched a courtroom bid to recoup the record fine, which was imposed in 2004 after the EC ruled the firm had broken competition rules by combining two types of software in one package.

The crunch legal battle, expected to last all week, sees the credibility of the European regulator and the future of Microsoft's massively successful business model both hanging in the balance.

Two years ago, the EC ruled that Microsoft, the world’s largest software developer, should not incorporate its Media Player software, which plays videos and music, in its near-ubiquitous Windows operating system, because the practice crowded out competitors.

To remedy the situation, the EC forced Microsoft to release a version of Windows without Media Player to allow the take-up of rival audio and video software. However, Microsoft today told a special assembly of 13 judges of the European Court of First Instance, Europe's second highest tribunal, there had been no demand for the standalone Windows product from computer manufacturers who account for 90 per cent of sales.

The EC also ordered Microsoft to open up some of the blueprints of its technologies so that other software developers would be able to make products that would work smoothly on Windows.

The case could have widespread ramifications for future EU anti-trust rulings. Michael Grenfell, a competition partner at Norton Rose, the law firm, said the dispute represented a clash between two organisations who can afford to "fight all the way" and cannot afford to lose.

The growing importance of online media downloads - which can be played on Media Player - made it essential that the sector should be competitive, Mr Grenfell said.

"The Commission also wants to establish the legal principle that it can require companies with market dominance to share intellectual property rights - in this case, software codes - with their competitors."

He added: "For Microsoft, the ability to leverage off its success with Windows to expand into other markets, including the fast-growing markets for downloading media services, is a key part of their future business prospects."

Microsoft, which has brought to Luxembourg a small army of 60 lawyers, computer scientists and other experts - a team twice as big as the EC's - today argued that the European regulator "erred" in making its 2004 judgements.

Belgian Jean-Francois Bellis, one of Microsoft's lead lawyers, accused the commission of making "serious errors" in imposing the fine.

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