Microsoft is now facing a record €497m fine as well as having to pay 80 per cent of the legal costs of the case.
The software giant will also have to assist its rivals with third-party integration through documentation and support, and strip its media player software from a version of Windows.
The Luxembourg court said in its ruling: "The Court of First Instance essentially upholds the Commission's finding that Microsoft abused its dominant position."
Bo Vesterdorf, the presiding judge, added: "The court finds that the Commission did not err in assessing the gravity and duration of the infringement, and did not err in setting the amount of the fine.
"Since the abuse of a dominant position is confirmed by the court, the amount of the fine remains unchanged."
The case began in 1998 following a complaint to the European Union by Sun Microsystems, accusing Microsoft of using its operating system dominance to squash competition in other areas such as media players and internet browsers.
However, analysts have warned that this is far from the end of the road. " The EU has its victory but it must now work hard to bring the case to a conclusion," said David Mitchell, senior vice president of IT research at Ovum.
"The ruling will not bring an end to the case, and will not deliver the closure that everyone outside the self-perpetuating legal bean-feast wishes to see.
"There is the potential for a continued debate concerning Microsoft's compliance with the measures, with claims that the progress made by Microsoft in documenting and opening up its protocols already constitutes compliance, against a vague and unclear original request."
Microsoft general counsel Brad Smith said that the company will be studying the decision in detail, and that "if there are additional steps that we need to take in order to comply with it we will take them."
Smith will hold a press conference later today in Brussels to discuss the judgement and Microsoft's reaction.
As the European Court of First Instance is the EU's second highest court, the case can still be appealed to at the European Court of Justice.
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