By Peter Kaplan

WASHINGTON (Reuters) - A federal judge on Friday endorsed Microsoft Corp.'s MSFT.O antitrust settlement with the U.S. government and nine states in a victory for the software giant that thrilled investors.

U.S. District Judge Colleen Kollar-Kotelly rejected nearly all the demands for stronger sanctions by a group of nine other states, saying they "present little, if any, legitimate justification for these remedies and in most instances these proposals are not supported by any economic analysis."

The non-settling states had charged the agreement was too weak to stop Microsoft from abusing its dominance.

California Attorney General Bill Lockyer told reporters that his initial inclination is not to continue the legal fight with Microsoft, although he would not completely rule out an appeal.

Lockyer said he believes Microsoft will comply with the decrees. "I think they are aware of the drain on corporate attention" from the case, he said.

Antitrust experts said Friday's ruling could very well bring the 4-1/2-year-old court case to an end.

"It looks like a near complete victory for Microsoft and for the Justice Department and the states that participated in the settlement," said Washington, D.C. antitrust attorney William Baer, an antitrust official in the Clinton administration, which brought the case.

"On first glance, this appears to be a thoughtful, factually based decision of the sort that is often bulletproof on appeal," said Baer.

Microsoft stock, which had been down ahead of word of the ruling, rose $3.33 or 6.3 percent to $56.70 a share on the decision in after hours trading.

Kollar-Kotelly's ruling acknowledged that Microsoft "has a tendency to minimize the effects of its illegal conduct" and had showed a "paternalistic view" toward consumers.

But the judge agreed with Microsoft that most of the states' proposals went beyond the company's misdeeds, and that they would mostly benefit Microsoft competitors.

The U.S. Justice Department applauded the ruling, saying the settlement would both address Microsoft's unlawful conduct and restore competitive conditions in the software industry.

Attorney General John Ashcroft said the department was "strongly committed" to ensuring that Microsoft complies with the settlement and will continue to closely monitor the company's implementation of its terms.

An appeals court ruling in June 2001 upheld trial court findings that Microsoft had illegally maintained its Windows operating system monopoly, but rejected breaking the company in two. The case was then transferred to Kollar-Kotelly to determine the appropriate remedies in the case.

"Microsoft lost every battle and they won the war," said Shane Greenstein, technology business professor at the Kellogg Graduate School of Management at Northwestern University. "The lesson everyone learned here is just stay out of Microsoft's way."

MICROSOFT PLEASED

"We are pleased to put another step in this case behind us," Microsoft Chairman Bill Gates told reporters at a news conference after the ruling.

The settlement was reached between Microsoft, the Justice Department and nine states in November 2001 after Kollar-Kotelly urged the parties to reach an agreement.

The settlement gives computer makers greater freedom to feature rival software on their machines by allowing them to hide some Microsoft icons on the Windows desktop.

Microsoft is prohibited from retaliating under the settlement against computer makers who choose to feature non-Microsoft products. Nor could it enter into agreements that require the exclusive support of some Microsoft software.

Under the settlement, Windows will be sold under a standard license to the major computer makers, although discounts would still be allowed according to the volume of the order.

The proposed settlement would be overseen by a three-person committee and would expire after five years with the possibility of a two-year extension.

Kollar-Kotelly also set a condition for her endorsement of the settlement: That she retain clear-cut authority to intervene in the enforcement the decree if necessary.

"The court considers it imperative, in this unusually complex case, for the court's retention of jurisdiction to be clearly articulated and broadly drawn," the judge wrote.

The states had wanted their sanctions to last 10 years, overseen by a special master who would report directly to the court.

The nine states that declined to settle were California, Connecticut, Florida, Iowa, Kansas, Massachusetts, Minnesota, Utah, West Virginia, plus the District of Columbia.

These non-settling states had asked for greater disclosure of Microsoft's code to allow rival software to work better with Windows.

JUDGE AGAINST BROAD CODE DISCLOSURE

But the judge agreed with Microsoft that forcing it to make such "over-broad" disclosures would lead to "wholesale copying or cloning" of its prized Windows operating system.

The dissenting states also had sought a version of Windows with removable add-on features to create opportunities for competing versions of features like Internet browsers and media players.

After the ruling, the dissenting state attorneys general praised the judge for adopting a few of their ideas.

One change made by the judge will ensure that computer makers can offer customers a wider array of Internet access providers, an attorney for the dissenting states said.

Another revision by the judge bans Microsoft from threatening retaliation against computer makers, whereas the Justice Department settlement banned only retaliation itself, the dissenting states said.

The case was first filed in 1998. It included charges that Microsoft used Windows to promote its Internet Explorer and destroy a rival browser made by Netscape, now part of the AOL Time Warner Inc. AOL.N online and media empire.

With roots going back to government antitrust scrutiny of Microsoft beginning in 1990, the case has been compared to the great government antitrust confrontations with computer giant IBM and telephone behemoth AT&T in the 1970s and early 1980s.

Last year, the U.S. Court of Appeals for the District of Columbia agreed that Microsoft illegally maintained its Windows monopoly by acts that included commingling Internet Explorer code with Windows to fend off Netscape's browser.

The appellate judges rejected breaking the company in two to prevent future antitrust violations, but sent the case to a new judge, Kollar-Kotelly, to consider the best remedy.

Microsoft has long argued the case was orchestrated by rivals like AOL Time Warner and Sun Microsystems Inc. SUNW.O , and would deprive consumers of a reliable platform for software.