MICROSOFT and IBM have agreed a near billion-dollar settlement over a legal dispute dating back to the mid-1990s.

Microsoft, the US software group, has agreed to pay its rival $775 million (£430 million) to settle claims that some of its business practices adversely affected IBM.

In addition to the lump sum settlement, Microsoft will extend $75 million in credit to allow IBM to deploy Microsoft software.

The settlement refers back to a competition case brought against Microsoft by the US Government during the 1990s, in which IBM was identified as a victim of Microsoft’s practices. Microsoft agreed to settle the claims to resolve what were considered to be overcharges and unfair pricing practices against IBM.

The claims involved IBM’s OS/2 operating system, which rivalled Microsoft’s Windows operating system software, and IBM’s SmartSuite of database and other office products.

However, the extent of the agreement left some of IBM’s claims unresolved. The settlement excludes claims by IBM that Microsoft’s dominance of the software market caused harm to IBM’s server and server software business. As part of the settlement, IBM has agreed that it will not make further claims for damages relating to damage to its server business for at least two years. In addition it will not attempt to recover damages for claims dating back before 2002.

Ed Lineen, senior vice-president and general counsel at IBM, said: “IBM is pleased that we have amicably resolved these long-standing issues.”

The two groups have been in talks over reaching a settlement for the past two months, having agreed in November 2003 to seek ways of resolving the claims without protracted litigation. That agreement was set to expire this month.

Brad Smith, Microsoft’s general counsel and senior vice- president, said that the agreement would enable the two groups to move on. “Over the last few years we have been focused on resolving our disputes with other companies, and today’s announcement takes another significant step towards achieving that goal.”

Microsoft is renowned for fighting its corner in the courts, having faced calls in the past from the US Government’s anti-monopoly division to break itself up.

Last year the European Commission concluded that the group had abused its dominance of the software market. The Commission landed the group with a record €497 million fine. It also ordered the group to launch a separate version of its Windows software that “unbundles” its Windows Media Player software, which plays audio and video files.

The group was also ordered to make available the “blueprints” to its software, to enable peers to interact better with Microsoft software.