By Caroline Humer

LAKE BUENA VISTA, Fla. (Reuters) - Microsoft Corp. MSFT.O won't cut the price on its Windows operating system to compete with a $199 personal computer that runs rival operating software, the No. 1 software company's CEO said on Wednesday.

Walmart.com, the online shopping site of the nation's largest retailer Wal-Mart Inc., has been selling a $199 personal computer -- monitor and modem not included -- that runs the Lindows operating system.

LindowsOS, from San Diego, California-based Lindows.com, is based on the Linux operating system, which is a free, open-source operating system that is increasingly being used by large corporations for back-end systems. But it has made few inroads in PCs.

The computer is made by Microtel Computer Systems and runs on a microprocessor from VIA Technologies 2388.TW , the Taiwan chip maker.

"Somebody is subsidizing that hardware. Somebody's losing -- people know what power supplies and processors cost," Microsoft Chief Executive Officer Steve Ballmer said at a Gartner technology conference here.

The $199 price tag is less than half the price of Windows-based PCs from low-priced vendors like Dell Computer Corp. DELL.O or Gateway Inc. GTW.N , which sell PCs for as little as $500 or $600. It's also below the $399 entry-level price at eMachines Inc.

Demand for personal computers has been weak for almost two years as both businesses and consumers have held back on spending. Gartner said earlier this week that a return to higher PC demand may be delayed as users make do with the PCs they already have.

Microsoft's Windows operating systems for low-end PCs costs about $50, and Ballmer said that price has been steady for at least seven years.

Cutting the price of the operating system by $20, for instance, wouldn't sell more machines, he said.

"Will that really drive a lot of demand? No. Will it wipe out our ability to do innovative work like Windows XP? That it will do," he said.

In addition, he said, it would cause "logistical nightmares" in terms of licensing for PC manufacturers, who often load the Windows operating system onto PCs before they ship them.

LindowsOS is designed to run Windows applications.

Microsoft sued Lindows.com in December of 2001 for trademark infringement, saying the name would confuse the public. Lindows.com was started early in 2001 by Michael Robertson, who founded MP3.com and later sold it to Vivendi Universal.

Microsoft had said it spent $1.2 billion over the past 18 years to market and promote Windows, which runs an estimated 90 percent of the world's personal computers, and that Lindows threatened the brand value.