Updated from 2:33 p.m. EDT

Microsoft

(MSFT) - Get Report

agreed to scale back its investment in

Telewest

(TWSTY)

, the U.K. cable company, four months after the

European Commission

began investigating the deal's potential to limit competition in the broadband cable industry.

Sated by the retreat, the regulatory body of the 15-nation

European Union

said it would end its investigation. Both parties earlier this week denied published reports that the commission planned to block the deal.

The joint takeover, which Redmond, Wash.-based Microsoft had planned to execute with

AT&T's

(T) - Get Report

Liberty Media Group

(LMG.A)

, would have concentrated control of the supply of software for digital cable television in its hands, the commission contended in a formal objection issued in May.

Microsoft informed the commission that it would limit its investment in Telewest to a 23.7% stake, break structural links with Liberty Media and give up rights "which would have given it decisive influence over decisions at Telewest," the panel said in a statement issued Friday. The commission voiced concern about Microsoft's stake in Telewest rival

NTL

.

Jim Cullinan, a Microsoft spokesman, said the company had simply "agreed to cede some of the preferential voting rights under the proposed investment in order to address the concerns of the European Commission."

"We are very pleased with the end result of this process, and are eager to finalize this deal," Cullinan said. "This investment is part of Microsoft's strategy to promote the deployment of broadband Internet services to consumers. This deal will help do that and this is good news for consumers in the U.K."

With U.S. antitrust regulators scoring victories in court and computing itself shifting its focus from the PC to the Internet, Microsoft has invested heavily in telecommunications software. The European Commission, which investigated the company's dominance in the market for operating systems at the beginning of the 1990s, closed its investigation in 1994. European officials have stood back as U.S. prosecutors brought the company back into court, but, also unlike U.S. regulators, they have heavily dogged the company's moves into cable television and communications software.

On Jan. 25, 1999, Microsoft said it would invest $500 million in NTL, then one of Britain's three top cable television operators. (NTL recently merged with

Cable & Wireless

, narrowing the field to itself and Telewest.) The move was intended to accelerate NTL's development of a high-speed network for phone, digital cable television and Internet service. It was not the company's first foray into telecommunications. In 1997, Microsoft had invested $1 billion in

Comcast

(CCZ) - Get Report

and purchased

WebTV Networks

for $425 million. But it would eventually prove a crucial stumbling block in the effort to take control of Telewest.

Four months later, Microsoft's intentions became more clear. It signed a broad agreement with AT&T, investing $5 billion in exchange for the telecommunications giant's pledge to use Windows CE, the Microsoft operating system for handheld computers, in at least 2.5 million television set-top boxes. At the same time, AT&T signed a complex deal to buy

MediaOne

(UMG)

for $54 billion.

In the same deal, Microsoft agreed to take MediaOne's 29.9% share of Telewest. Though exact terms were never disclosed, AT&T had previously estimated the value of the stake as $3.5 billion. Microsoft reportedly paid considerably less.

This deal was also described as intended to accelerate the deployment of broadband, or high-speed digital networks.

On March 22, the commission said it would investigate fears that the agreement would reduce competition in the digital cable industry. Specifically, the commission said, Microsoft's links to NTL fueled concerns that the company would be able to embed its technology in both companies' infrastructures. That could have created higher consumer prices for digital television, expected to become the main means of accessing the Internet, according to the commission.

The matter is further complicated by last week's announcement by

United Pan-Europe Communications

(UPCOY)

that it planned to buy Liberty Media's stake in Media One. Based in the Netherlands, that company is Europe's biggest independent cable television operator. Microsoft owns an 8% stake.

Microsoft closed up 1 1/16, or 1.31%, at 82.