Several States That Back Breaking Up Microsoft Holding Up Settlement

A ruling in the case is expected as early as Tuesday.
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Updated from 2 p.m. EST

Several states that advocate breaking

Microsoft

(MSFT) - Get Report

into separate units are holding out against a settlement in the antitrust case against the software company, people close to the negotiations said Monday.

Reaching an agreement before Judge Thomas Penfield Jackson issues an anticipated harsh ruling against the company appears unlikely, these people said, speaking on background and on the condition they not be identified. A ruling is expected as early as Tuesday, and a few states are unwilling to accept several planks of a proposal issued by the company, these people said.

Shares of Microsoft fell Monday after news reports said the company's proposal had been rejected. Public perception of the secret negotiations shifted from last week's belief that a settlement was imminent to a somewhat bleaker view, analysts who cover the company's stock said.

By midafternoon Monday, Microsoft's stock was down 5 3/16, or 5%, at 105 7/8. (The stock ended the day session down 7 5/8, or 6.83%, at 104 1/16.)

The negotiations between Microsoft, the

Department of Justice

and 19 states have gained urgency in the past week because Jackson has long made clear his intent to issue a ruling around the first week of April. But there is no legal deadline, and it remains possible the parties could ask the judge for more time.

"People still believe they're negotiating," said Robert Koggan, an options trader at

Miller Tabak

, which does not own Microsoft stock. "What they don't believe is that they're as close as they were Friday."

Microsoft, the Department of Justice and state attorneys general declined to comment publicly on the settlement

negotiations Monday.

Private negotiations between Microsoft and the Justice Department began in the fall after Jackson named Judge Richard Posner, of the

7th Circuit Court of Appeals

, to mediate the talks.

In the case, the government contends that Microsoft monopolizes the market for operating systems and employs predatory tactics to maintain and expand its monopoly.

A settlement could include opening the Windows operating system source code for competitors to view while designing applications, accepting regulatory oversight or a combination of the two options. Several states have pushed for splitting up the company into two or three separate units.

Strong incentives to settle exist for both sides. For Microsoft, any ruling that the company is a predatory monopolist could be used against it in civil and class action cases brought by customers and competitors. For the Department of Justice, a lengthy appeals process would likely last through the presidential election.

Throughout the negotiations, speculation about an ending to the highly secretive talks have emerged repeatedly since November, prompting market players to swing the company's stock price back and forth across a tight 20-point playground. The stock did not break out of that range -- from the low 90s to the low 110s -- Monday.

Last week, reports that a settlement was imminent fueled a 16% run from the March 20 opening price of 98 3/4 to a Friday high of 115. The shares traded as low as 104 3/4 Monday.

For months, the stock has been driven by trial news reports citing anonymous sources, more so than by highly anticipated product release like Windows 2000.