Microsoft is expected to release a rival to the iPod, Apple’s iconic range of portable music and video players, in time for Christmas.

The Microsoft gadget will attempt to usurp the iPod, the undisputed market leader, by offering a wireless internet capability that will allow users to download music without being connected to a computer, according to reports.

It is also understood that Microsoft executives have held negotiations with major record labels and television networks on deals that would allow it to sell music and video content online through a service similar to Apple’s iTunes Music Store.

Bill Gates, the Microsoft founder who recently announced he will step down from the company, is known to covet Apple’s iPod success.

Apple has now sold more than 50 million iPods since the product's debut in 2001, an event that transformed its fortunes. The company now earns more in revenues from the music players than from its signature "Mac" computers.

Looking to feed the same appetite for media content on the go that has supported the iPod, Microsoft has already released plans for a new generation of ultra mobile PCs, dubbed The Origami Project.

On a site that could give clues on the shape of Microsoft's iPod rival, the company is currently using a blog to garner opinion on how its Origami product should look.

Earlier this year, it also launched an online music store, called Urge, in partnership with MTV.

Together, Origami and Urge already form the building blocks of a top-down music download service, similar to the pairing of the iPod and iTunes.

According to reports, Robbie Bach, who was appointed president of Microsoft's entertainment and devices division in December, is working with J. Allard, vice president of Microsoft Xbox games console business, on the project.

Microsoft’s Xbox experience could be key to the success of a music offering, sources close to Microsoft told Times Online.

The games console, which stole a march on Sony’s PlayStation 3 and Nintendo’s new Wii console by beating them to market, already offers gamers the ability to go online to download content ranging from video games to music videos.

According to Microsoft executives, Xbox downloads have so far outpaced the rate of growth achieved by the iPod on its release – though that was half a decade ago, when fewer people had high-speed broadband internet connections.

Meanwhile, the growth in the market for downloaded music has led analysts across the globe to ask when Microsoft would finally launch its own "iPod killer". In February, a pupil at John Marshall High School in Seattle managed to extract the frankest answer from Mr Gates.

When asked by 19-year-old Schyler Mishra whether Microsoft was planning a hand-held music player, Mr Gates asked a group of students how many of them owned an iPod.

Surveying the sea of raised hands, there was evidently only one answer he could give: "We are talking with partners about how we … can make even better music players."

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