Microsoft has admitted that a bug in Windows XP may result in data loss if users reinstall, repair or upgrade the operating system.

According to the software giant, the problem is caused by an errant XP Wizard which can spell disaster for saved data and system settings.

It creates a file, Undo_guimode.txt, in the Windows\System32 folder that runs when users first start a computer with Windows XP preinstalled by a computer manufacturer.

If this file has been created when a user upgrades or repairs the OS, Microsoft warns: "You may lose data that is stored in the All Users folder and default program templates and settings that are stored in the Default User folder after you reinstall, repair, or upgrade Windows XP. You may be missing Start menu shortcuts, items in the Startup group, and documents, pictures, or music files that are stored in the Shared Documents folder."

The data loss will occur if a user attempts to perform any of the following actions:

The problem occurs with both Windows XP Home and Professional editions. It does, however, apply only to computers which have had Windows XP preinstalled by a computer manufacturer.

In order to work round the bug, Microsoft advised users to delete the offending file and back up data: "To resolve this problem, restore the missing data and program shortcuts from a backup. To prevent this problem from occurring, manually delete the Undo_guimode.txt file from the Windows\System32 folder."

Microsoft promises that patches to resolve this problem will be available soon as a dynamic update from its website.

A separate update will be available for computer manufacturers and corporate administrators.