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shares fell Wednesday after a newspaper said federal prosecutors in the antitrust case against the software giant were closer to agreeing that it should be broken up.

Government lawyers lined up Wednesday to disown the article, but Wall Street remained spooked.

By midafternoon, the company's shares were still down 3 13/16, or 3%, at 105 1/2. (Microsoft settled down 3 9/16, or 3%, to 105 13/16.)

Citing what it called sources close to the matter,

USA Today

reported on its front page that government lawyers "appear to have reached a consensus approach."

The paper said the consensus would advocate dividing the company into separate organizations: One to sell the Windows operating system and another for other software. The paper said it was unclear what would become of the company's Internet operations.


Justice Department

took exception. "The story is incorrect in several important aspects and it does not accurately reflect our views," said Gina Talamona, spokeswoman for the department. She declined to be more specific.

Such rumors about the negotiations have circulated before, but never on the front page of a national publication. A Microsoft spokesman reiterated the company's stance, which he most recently took when wild

rumors sprung from speculative options buying on the

Pacific Exchange


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"We really can't speculate on what the government might be thinking," said Jim Cullinan, spokesman for Microsoft. But "the notion of breaking up Microsoft is an extreme and radical proposal."

In the antitrust case, Judge Thomas Penfield Jackson has made a preliminary ruling that Microsoft has a monopoly and predatory marketing practices. Judge Richard Posner of the 7th U.S. Circuit Court of Appeals is supervising negotiations between the company and government lawyers in Chicago.

Government lawyers from the Department of Justice to the 19 attorneys general whose cases against the company were consolidated have maintained a bond of silence during the negotiations. Still, Microsoft rumors have roiled the markets repeatedly in recent months on settlement rumors, especially around important dates in the case.

And the calendar is ripe for rumors. Microsoft's response to the government's proposed conclusions of law in the case is due on Tuesday.

"As we come closer to the end of the month, there are going to be noises like this," said James Lucier, a

Prudential Securities

analyst who covers legal and regulatory issues. "Any idle speculation by people who are not sitting at the table is just that." The USA Today report "is just talks about a consensus among government lawyers," he said. "Who does that mean?" Lucier doesn't rate individual stocks, but his firm has a strong buy rating on Microsoft shares and has not done underwriting for the company.


National Association of Attorneys General

held a conference, "The Impact of the Internet on the Misssion of Attorneys General," at

Stanford University

in Palo Alto, Calif., on Monday and Tuesday. "We were expecting some sort of story to come out of that meeting," Lucier said. "The state AGs have been much more hawkish in pursuing a settlement."

The states originally focused their suits on breaking the Windows operating system from other software applications, while the Department of Justice raised concerns about the company's tying of its Internet browser to its operating system.

Of the 19 attorneys general involved in the case, spokesmen for six said their offices did not talk to the newspaper.

"We're under a gag order," said Scott Brown, spokesman for New York Attorney General Elliot Spitzer. "I just think it's bizarre that the story's not sourced."

Bob Brammer, spokesman for Iowa Attorney General Tom Miller, chimed in with a denial on behalf of his boss, chairman of the executive committee of the 19-state

Microsoft Working Group


"We're not commenting at all on the

USA Today

story, which doesn't look like it has many sources," he said.

Sean Baine, spokesman for Maryland Attorney General Joseph Curran Jr., added that the timing of the NAAG meeting suggested the story originated there.

Ellen Cooper, chief of antitrust for the Maryland attorney general's office, said she could not comment on any aspect of the Microsoft case, including whether she had spoken to

USA Today


Spokesman for the remaining 12 did not return phone calls for comment.

Whether any prosecutors actually talked to the paper, the story's appearance dragged the case back into the spotlight on Wall Street, where many analysts believe the company's stock price has been depressed by the litigation.

The proposed merger of

America Online



Time Warner


has pressured the company's stock this week, and revived breakup rumors added extra pressure, traders said.

"While they're under pressure from the Justice Department, they certainly can't go out and use the stock to buy a media company," said Robert Koggan, options trader at

Miller Tabak

. "They are certainly well behind the 8-ball here as far as content is concerned."


USA Today

story also reminded readers that some attorneys general had originally sought to force the company to create clones of the Windows operating system. That note at the end of the story, not even described by the paper as a specific or new proposal, was enough to jolt the stock additionally, he added.

"Confirmed or not, no one wants to hear about clones being formed on them," Koggan said.

That includes the company.

"If you talk about forced licensing, you're talking about companies from all around the world being able to get source code for Windows," said Cullinan, the Microsoft spokesman. "That is not good for the U.S. economy."

He added that such a move would also hurt software developers and, by extension, customers.