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Political pressure mounted for the Bush administration to seek a settlement after a federal appeals court Thursday unanimously overturned the proposed breakup of software giant Microsoft Corp.

In a 7-0 ruling, the U.S. Court of Appeals for the District of Columbia Circuit set aside the breakup order, narrowed the government's antitrust case and sent it to a new judge to decide whether a breakup or some other penalty is warranted for the software giant.

The ruling kept intact much of U.S. District Judge Thomas Penfield Jackson's findings that the company maintained an illegal monopoly but, in unusually strong terms, harshly criticized him for his handling of the case.

The 125-page edict left the company as well as government prosecutors claiming a significant victory in the 3-year-old case.

Members of Congress pressed the Bush administration to settle the case that began under President Bill Clinton.

"Let's hope that we can put this lawsuit behind us," said House Speaker Dennis Hastert, R-Ill.

House Minority Leader Richard A. Gephardt, D-Mo., said he hoped the ruling "will cause the parties, and the court, to go back and see if they can come up with an appropriate, sensible agreement."

The White House hinted that President Bush preferred an out-of-court solution.

"The president believes people should work hard to enter into agreements, and the president believes there's too much litigation in our society generally speaking," White House press secretary Ari Fleischer said.

Iowa Attorney General Tom Miller, a leader of the 18 states that launched the case, said his colleagues were open to a settlement if it brought "fundamental change about how Microsoft conducts itself."

But New York Attorney General Eliot L. Spitzer warned against making too many concessions. "There is nothing in this opinion that would justify a revised perspective on this litigation on the part of the Justice Department," he said.

The Justice Department is studying its options, which include an appeal to the Supreme Court, a settlement or asking the new judge taking over the case to impose penalties on Microsoft.

"This is a significant victory," Attorney General John Ashcroft said.

Bill Gates, Microsoft's chairman and founder, welcomed the ruling, which he said "removes the cloud of breakup."

He and other company executives also signaled a renewed willingness to consider a negotiated settlement, although several previous attempts have foundered. The company will "work hard to resolve the remaining issues without continued litigation," he said.

The last settlement talks fell apart 14 months ago after Gates rebuffed government demands for a breakup. He also objected to the government's insistence that Microsoft share more of its "source code" -- the internal design of its software -- with outsiders.

The decision makes it increasingly unlikely that Microsoft will be able to escape any sanctions for its anti-competitive behavior, but also that a dramatic restructuring of the company along the lines contemplated in the overturned order would pass judicial muster.

"It's a compromise decision," said Steven D. Houck, a former member of the legal team representing 18 state attorneys general and the District of Columbia in the case. The unanimity of the ruling was remarkable for a court with a "wide divergence of political views," Houck said, noting that the judges "upheld the heart of the case, which was the maintenance of an illegal monopoly."

From Microsoft's standpoint, perhaps the most positive aspect of Thursday's decision was its reversal of the corporate dismemberment order issued by Jackson a year ago. Although the appellate court ordered a lower court fashion a suitable remedy for the company's illegal conduct after holding new hearings, the judges strongly hinted that they would not favor dividing the company into two enterprises.

Judge taken to task

Perhaps the most unusual aspect of the appeals court's ruling was its blunt assessment of Jackson's conduct. The judges disqualified Jackson from presiding further over the case because of what they termed his "deliberate, repeated, egregious, and flagrant" violations of judicial ethics during trial, when he gave media interviews excoriating Microsoft on condition they not be published until after conclusion of the trial.

But they stopped well short of granting Microsoft's request that all of his rulings in the case be reversed.

Instead, by upholding Jackson's findings that Microsoft maintained a monopoly in the computer operating system software market through anti-competitive conduct, the appeals court let stand the threat of severe sanctions and may have strengthened the hand of any other potential plaintiffs inclined to claim that Microsoft's competitive behavior damaged their businesses.

"This decision basically gives the go-ahead to the private plaintiffs suing Microsoft," said Herbert Hovenkamp, an antitrust expert at the University of Iowa law school. More than 100 private antitrust cases are pending against Microsoft.

Ruling pleases investors

Investors greeted the ruling with enthusiasm. Microsoft shares rose $1.60 at close at $72.74 on the Nasdaq stock market.

The appellate ruling was the latest turn in a three-year antitrust case in which the U.S. Department of Justice, 18 states and the District of Columbia allege that the giant software company engaged in a raft of illegal acts to maintain its monopoly over operating system software for personal computers.

On the three major charges that were part of the complaint, the appellate court largely agreed with Jackson's finding that the company maintained its Windows monopoly through illegal conduct; rejected his finding that the company illegally attempted to extend its Windows monopoly to the Web browser market; and asked a lower court to re-examine his finding that it illegally incorporated the Explorer Web browser in Windows, a practice known as "tying."

Analyst Neil McDonald of Gartner Group, a high-tech consulting firm, said the decision could embolden Microsoft to proceed with bundling new products in its Windows XP operating system and its .NET suite of Internet products.

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