An upcoming Microsoft ( MSFT) software product for clustered servers won't run on Intel's ( INTC) high-end Itanium 2 chip, according to a report first published on News.com. Instead, it will be optimized for a more mainstream type of server chip from Intel and rival Advanced Micro Devices ( AMD).

Itanium, which debuted in 2001, has long been rapped for failing to gain a level of market acceptance proportional to its high design costs. The latest news signals that Itanium will at least initially be left out of a server market that has gained increasing sway in the computing world.

Clustered servers -- linked networks of servers, which each contain only two or four processors -- were first viewed as a low-cost alternative to bigger, more expensive hardware. But they have quickly scaled the ladder to become important in high-powered academic and industry settings as well.

Of the world's 500 most powerful supercomputers, 296 systems were categorized as clusters, according to twice-yearly rankings released last week .

Microsoft's Windows Server 2003 Compute Cluster Edition, which is expected to be released in the second half of 2005, is the first product the company has designed specifically for clusters, according to a company representative.

Microsoft's decision not to run the software on Itanium comes after earlier news that Hewlett-Packard ( HPQ) will stop offering Itanium-powered workstations .

"It does show how Itanium is increasingly being redefined as a niche market solution for mainframe-class datacenter applications," said Krishna Shankar, an analyst at JMP Securities. "Itanium seems to have had the most success in very data-crunching intensive applications."

But he called the decision "not necessarily negative for Intel. What they lose in Itanium they make up with more Xeons." Intel's Xeon chips dominate the server chip market, though AMD has recently shown some momentum with its competing Opteron server chip. Opteron is a chip that scales up to take advantage of software optimized for high-end data crunching.

Intel's late summer release of a Xeon version with 64-bit processing capabilities -- a bid to catch up to Opteron -- will likely help it regain some of the ground lost to AMD, Shankar said. Shankar has a buy on Intel and AMD; he owns shares in Intel, but his firm hasn't done banking for either company.

At Intel, spokesman Robert Mannetta downplayed the significance of the Microsoft decision, saying, "It makes sense to first roll out the operating system for clusters based on Xeon, since it's the most widely used chip for clusters."

While the decision from Microsoft may deal somewhat of a setback to Itanium, Intel's mainstream server chip, known as Xeon, can boast a huge footprint in cluster computing.

Xeon accounts for 46% of all processors in the Top500 list of supercomputers, outpacing second-ranked Itanium, which claims 17%. (AMD's Opteron accounts for only 6% of chips in the top 500 systems.)

Mannetta acknowledged that Intel would eventually like to sell Itanium into the cluster market, but said that right now the company's plan is to pit the chip against high-end proprietary silicon from Sun Microsystems ( SUNW), H-P and IBM ( IBM).

As evidence of Itanium's high-end capability, he pointed out that the second most powerful supercomputer in the world, built for NASA, runs on Itanium 2 processors. Known as Project Columbia and based on hardware from Silicon Graphics ( SGI), the system is powered by more than 10,000 Itanium chips.