But attorneys general from 18 states have not signed off on the deal. They are deciding whether they can be satisfied with proposed penalties Microsoft would face for at least the next five years, according to people familiar with the negotiations.
An agreement could offer the economy and technology industry a glimpse of national optimism when both have been battered amid concerns about terrorism and the dramatic downturn in financial markets.
U.S. District Judge Colleen Kollar-Kotelly, the new trial judge, had set a deadline of Friday for any settlement, citing "the recent tragic events affecting our nation.' Absent a settlement, the next stage of the trial begins to decide how to punish Microsoft.
Assistant U.S. Attorney General Charles James revealed the prospective agreement to state officials Wednesday and told them Microsoft had already largely accepted it, sources said, speaking only on condition of anonymity.
In late-night, secret talks in downtown Washington, state attorneys general and top lawyers from Iowa, New York, Connecticut and Wisconsin were weighing whether to agree to the deal but had made no conclusive decisions.
Terms of the settlement were closely guarded, and people close to the talks cautioned that precise language on important provisions was still being worked out. The Justice Department filed the case in 1998 under the Clinton administration.
President Bush has been relatively cold toward the lawsuit since his campaign, though the White House has said he hasn't interfered in the case.
The settlement would impose some restrictions on Microsoft during the next five years and could be extended two more years -- until 2008 -- if the company violates terms of the deal, according to one person familiar with the agreement. A three-person panel would monitor Microsoft's compliance. The current antitrust case is rooted in allegations that Microsoft violated a related 1995 agreement with the Justice Department.
The prospective settlement apparently would not require broad disclosures by Microsoft of the source-code blueprints for its monopoly Windows operating system, the underpinnings of its multi-billion-dollar business, since senior Microsoft executives and lawyers have said recently and repeatedly that any such mandate was unacceptable.
Officials also have declared they would not accept any broad prohibitions against bundling new features into Windows.
The settlement would prohibit restrictive contracts between Microsoft and computer makers that would discourage them from selling rival software, according to another person who was briefed on some of the provisions. But it would permit Microsoft to continue to offer financial incentives, such as price discounts, to entice computer makers to sell Windows.
A spokeswoman for the Justice Department, Mindy Tucker, declined to comment on the negotiations.
Microsoft Chairman Bill Gates has hinted in recent days of successful talks, saying on "The Charlie Rose Show' last week that he was fairly optimistic' an agreement would be reached. Microsoft spokesman Vivek Varma said Wednesday he would not talk about any aspect of the confidential discussions.
"We believe a settlement would be good for consumers and the overall economy,' Varma said.
The states have in the past suggested they would press forward against Microsoft if the U.S. government settled the case in ways unacceptable to them.
A U.S. appeals court this summer agreed unanimously that Microsoft violated federal antitrust laws when it sought to maintain its monopoly over computer operating system software. But the court reversed an order to break up Microsoft and threw into question another key element of the case. It also removed the trial judge, Thomas Penfield Jackson, because of interviews Jackson secretly gave to reporters during the court fight.
The Justice Department laid foundations for new settlement talks last month, when James, the U.S. antitrust chief, announced that the government would no longer seek a breakup of Microsoft and would drop part of its original lawsuit. He also decided against trying to block Microsoft from the release last week of Windows XP, the newest version of its flagship software.
The computer industry has eagerly been monitoring the talks, looking for a possible settlement and hoping it would combine with the release of Microsoft's new Windows XP operating system to invigorate the lagging industry that has helped drag down the stock market.
But an industry trade group that has been critical of Microsoft, the Computer and Communications Industry Association, complained late Wednesday that the Bush administration was "selling out' by seeking weak penalties.
Microsoft and Justice officials declined to comment on the group's charges, but a pro-Microsoft trade group, the Association for Competitive Technology, said that only Microsoft's competitors don't want to see a settlement.
