The company has taken down a blog written by journalist Zhao Jing, also known as Michael Anti, from its MSN Spaces portal.
Zhoa Jing, a Beijing-based researcher for the New York Times, was critical of a recent management change in China and the government asked Microsoft to remove the blog.
"Most countries have laws and practices that require companies providing online services to make the internet safe for local users," said a Microsoft spokesperson.
"Occasionally, as in China, local laws and practices require consideration of unique elements. This MSN Space has been blocked to help ensure that the service complies with local laws in China."
However, since Zhoa Jing has not been convicted of any crime it is unclear which local laws have been broken.
Daniel Simons, legal officer at free expression advocacy group Article 19, said: " There are two questions here. The first is ethical: how far do you go in working with a government in subjugating its citizens?
"The second is what Chinese law actually says. Most of this kind of censorship comes about due to agreements between companies and the Chinese government rather than what is required by law."
Simons added that the UN recently issued a declaration (PDF) stating that "corporations which provide internet searching, chat, publishing or other services should make an effort to ensure that they respect the rights of their clients to use the internet without interference".
The move has also brought sharp criticism from Microsoft's own blogger Robert Scoble. In a recent entry he likened the behaviour of his employers to the situation in Germany in the 1930s.
"It's one thing to pull a list of words out of blogs using an algorithm. It's another to become an agent of a government and censor an entire blogger's work, " he wrote. "Guys over at MSN: sorry, I don't agree with your being used as a state-run thug."
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