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WASHINGTON, Aug 17 (AFP) - An appeals court Friday rejected Microsoft's request to delay sending the government's antitrust case back to a lower court to reconsider penalties for acting as an illegal monopoly.

The US Court of Appeals ruled ordered the case sent to the lower court in seven days, raising the possibility that a new judge to be named could consider requests to block the release of the new Windows XP operating system.

Microsoft had asked the appellate court to halt any action in the US District Court while it appeals to the US Supreme Court. Such a move would have postponed the imposition of any penalty in the case, possibly for months.

But the Court of Appeals said in a one-page order that Microsoft "has failed to demonstrate any substantial harm that would result" from sending the case back to the lower court.

The ruling also said "it appears that Microsoft has misconstrued our opinion" on what would have been required to completely throw out last year's ruling by Judge Thomas Penfield Jackson.

"We are pleased with the (appeals) court's decision and we look forward to proceedings in the District Court," said Justice Department spokeswoman Gina Talamona.

Iowa Attorney General Tom Miller, speaking for the 18 states in the case, also applauded the order, saying, "It is important to keep the case moving forward as quickly as possible in such a fast-moving industry."

The appeals court on June 28 upheld a finding Microsoft acted as an illegal monopoly, but said the breakup of the company ordered by Jackson was not justified by the evidence.

The appeals judges sent the case to another district court judge for review, ruling Jackson violated judicial ethics in discussing the case with journalists.

Microsoft, in its filing August 7 with the Supreme Court, said the appellate judges should have disqualified Jackson for ethics violations and tossed out his entire findings of fact and conclusions of law.

Responding to Friday's decision, Microsoft spokesman Jim Desler said: "While we believe the process was best served through a stay, we are prepared to move ahead with getting the remaining issues in this case resolved while we await word on Supreme Court review."

He added: "We will move forward with the case that has been significantly narrowed with many of the original district judge's findings against the company rejected."

Friday's ruling clouds the outlook for the planned October 25 release of the Windows XP operating system, which has been criticized by some as a continuation of Microsoft's efforts to use its dominance in PC operating system software to squeeze out competitors in other areas.

"It's definitely a setback for Microsoft," said Nicholas Economides , an antitrust expert at New York University.

Economides said the latest decision "sets into motion the nomination of new judge who will decide on a schedule, set up dates for hearing on remedies," possibly within a few weeks.

Observers say the US and state governments that brought the antitrust case may seek to block the release of Windows XP.

Microsoft shares slid 4.24 percent, or 2.74 dollars Friday, to close at 61.88.

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