WASHINGTON, Nov 1 (AFP) - A landmark federal court ruling due Friday in the Microsoft antitrust case could clear the air after a grueling four-year court battle -- or set the stage for appeals and further legal fights.

US District Judge Colleen Kollar-Kotelly was to release her ruling at 2130 GMT on a proposed federal government settlement with Microsoft and a separate case with group of holdout states that say the settlement is too soft and are demanding tougher action.

Bill Gates' software titan has already been convicted of flouting competition rules by abusing its worldwide dominance, but the remedy imposed by a different judge -- breaking the software giant in two -- was tossed out by an appellate court.

Under a proposed deal signed last year with the US Department of Justice, the global software giant would be forced to restrict some business practices in exchange for an end to the case.

But the settlement has yet to be made binding by the court because half of the 18 states suing alongside the federal government refused to sign up.

The holdout states want Microsoft to offer a stripped-down version of its Windows operating system to give access to competing "middleware" such as Internet browsers and media players.

They argue the tougher sanctions are necessary to "unfetter" the market from Microsoft's monopoly abuses and to open up the market to more competition.

Nicholas Economides, a New York University professor who has been following the case, said that developments could remove much uncertainty hanging over Microsoft, which produces the software that runs most of the world's personal computers, and in turn over the rest of the industry.

"If the decision is a clear-cut affirmation of the settlement, then a lot of the uncertainty gets wiped out and things are much better, not only for Microsoft, but for everyone else," said Economides, who has argued in support of the settlement.

"People will know the terms of the game. It clears the picture about the terms of competition." But he noted that if the judge makes major changes to the federal settlement, "then it's possible that Microsoft will appeal and that creates extra uncertainty for the future ....you would have a chaotic situation."

Microsoft shares were down two percent in early trade at 52.20 dollars.

Analysts at Merrill Lynch do not expect the outcome of the ruling to have a material impact on the software giant's operations. However, they expect the company's shares to be under pressure due to the uncertainty surrounding the outcome.

"We remind investors that Microsoft could appeal the decision to the Appellate Court or Supreme Court," a Merrill Lynch report said.

"The appeals process could run for several quarters or more, in our opinion."

Goldman Sachs analysts believe that investors are expecting Kollar-Kotelly to rule in favor of the settlement.

For the non-settling states, it is possible that she may add some additional technical disclosures without crafting a materially different settlement, the Goldman Sachs analysts said.

The states that have rejected the government's settlement with Microsoft and have continued to pursue the antitrust case are -- California, Connecticut, Florida, Iowa, Kansas, Massachusetts, Minnesota, Utah, West Virginia and District of Columbia.

Microsoft has argued in its written filings that the holdout states are attempting "market engineering" that may end up hurting consumers, and are mainly being pushed by Microsoft's competitors.

Critics of Microsoft have argued that the firm is already violating the terms of the settlement by refusing to disclose key technical details of its Windows operating system.

011632 GMT NOV 02