The department of justice and the 19 states that brought the historic legal action against the world's largest software company believe that splitting the company into two will increase competition.

Their case, successful to date, has rested on proving the harm done to consumers by Microsoft's abuse of its monopoly position. By forcing Microsoft to separate its Windows operating system from all other applications, the federal government believes that the company will no longer be able to bully manufacturers into taking its new products by threatening to withhold a licence for Windows.

The government believes that the two resulting companies, dubbed Baby Bills after Microsoft founder Bill Gates, may even compete against each other.

In addition the companies would have an incentive to develop products for rivals. What would stop the manufacturer of Office from producing software to run on the increasingly popular Linux operating system, for instance, if the company had nothing to do with one of Linux's most bitter rivals?

Herbert Hovenkamp, a professor at the University of Iowa who has advised the government, has said: "The role of the remedy in a case like this is not to punish Microsoft but to restore competition."

Increased competition itself is proving divisive, with many Wall Street analysts denying that breaking up the company will benefit consumers.

Andrew Roskill, industry analyst at UBS Warburg, said: "The irony is that breaking up the company horizontally like this does not really solve any of the problems. There will still be one company with a dominant position in operating systems and one with a dominant position in the desktop publications business. It's ridiculous."

Both Windows and Office, the software "shell" for programmes such as Excel and Outlook, are established market leaders.

Windows has provided about 40% of Microsoft's annual revenues of $19.7bn. The two Baby Bills are also expected to share Microsoft's $21bn cash hoard, leaving them free to buy rivals unless restricted from doing so by the courts.

Legal experts have said that the government moved towards a break-up because it did not believe other so-called conduct remedies would be effective. But Bill Kovacic, a professor of law at George Washington University, said that yesterday's proposals were unlikely to end the government's involvement in the case, even if approved by the judge.

"A break-up will not be an antiseptic in avoiding subsequent oversight responsibility," he said.

Although it will take some time for analysts to work out the ramifications of any break-up, many were turning to precedent yesterday. Since the 1890 Sherman Act on monopolies 34 companies have been broken up because of abuses.

But the two most significant cases were the 1911 break-up of Standard Oil and the 1984 settlement with AT&T which saw the telephone monopoly divided. Microsoft is considered different because there is unlikely to be a settlement and because of the nature of the fast-changing software industry.

However, some analysts believe that the fast-changing nature of the industry is exactly what makes the government's view moot.