The free web-based service will produce reports to show how children are spending their time online, and will eventually allow parents to monitor and control who their children are contacting via email, IM and blogs.
Microsoft currently offers a filtering service for premium MSN subscribers, but said that it is responding to calls from parents who want the controls to be made available free of charge.
"Family Safety Settings is being designed to go a step further than traditional parental controls, and will help consumers better guard themselves and their families against online content and communications they might find inappropriate," a company statement said.
The settings are being developed with the help of the American Academy of Pediatrics (AAP) which will provide guidelines on appropriate surfing for different ages and translate them into suggestions for parents on which settings to use.
"It is critical for healthy child development to foster natural curiosity and a child's desire to learn," said Errol Alden, a paediatrician and chief executive of AAP. "The internet should be considered an ocean with much to discover. But there need to be guidelines."
Alden maintained that the idea is to encourage dialogue between parents and children about their online activities.
The new features in Windows Live are currently being beta tested, and Microsoft expects to launch them in the second half of this year.
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