Updated from 5:05 p.m.

Microsoft

(MSFT) - Get Report

filed its counterproposal to the government's

breakup plan Wednesday, asking instead for a remedy involving limits on its business practices.

The proposal asks Judge Thomas Penfield Jackson, who has ruled the software company violated antitrust laws, to set restrictions governing its license agreements with computer makers. The restrictions would prohibit Microsoft from withholding license agreements from companies that ship or promote operating systems other than its ubiquitous Windows system.

The proposal would also require Microsoft to allow computer makers to ship versions of Windows that do not include Internet Explorer, the company's Web browser, as a default browser.

"Not only is the breakup an unprecedented remedy in the 110-year history of the Sherman act, it is also an unwarranted remedy," said William Neukom, the company's lead attorney. "Breaking up this company is a punitive proposal."

Calling the government's conduct proposals "draconian measures," Neukom said disclosure of source code to competitors would mean "that companies like

IBM

and

Sun

would receive billions of dollars in Microsoft intellectual property."

Neukom added: "We would essentially be competing against ourselves."

Neukom suggested the court could adopt its conduct proposals as a stopgap while appeals continue.

This plea for leniency, required by the court, comes despite the company's clearly stated plans to appeal Jackson's ruling. In the proposal, Microsoft seeks to show that even if the government's case proves antitrust violations, breaking up the company is an ineffectual and overly radical solution.

The Justice Department and 17 attorneys general proposed last month to split the company into two parts. One company would own the operating system business while the other would own the remainder of Microsoft's assets, including the Office software package, Web browser and the

MSN

network of Web sites.

The government proposal also contains conduct remedies, including some that appear in the company's proposal. Two states abstained from the government proposal because they oppose the breakup.

Tom Miller, the Iowa attorney general and head of the states' Microsoft working group, said the measures proposed by Microsoft "would not have prevented the serious violations of law found by Judge Jackson, and they are not adequate remedies to assure that the law is not broken in the future."

The combined breakup and conduct remedies "represents measured relief that will spark competition through innovation," he said in a statement.

Microsoft's shares fell 1 5/8, or 2.4%, to close at 66 3/16 Wednesday. The proposal was released shortly after markets closed. According to

Instinet

, Microsoft finished after-hours trading down 11/16, at 65 1/2.

Jackson's Conclusions of Law in the case, issued April 3, found that the company was discriminatory in granting access to parts of the Windows code called applications programming interfaces, which software designers need to make their programs work with Windows.

He also ruled that the company broke antitrust laws by tying Internet Explorer to Windows. Microsoft contended that the browser is an integral part of Windows, not an unlawfully tied application.

Jackson also found the company maintained its Windows monopoly by setting deals with computer makers to promote Microsoft products over those from rival software makers. Computer makers were also kept from altering the desktop, the screen that appears when no programs are running and features the icons of various programs, Jackson ruled.