European regulators stepped back from a major confrontation with Microsoft Corp., agreeing to compromise with the U.S. software company in a long-running antitrust battle.

With both sides making concessions, European Union regulators at least for now dropped a threat to fine Microsoft as much as $5 million a day for failing to comply with E.U. orders last year to open technology markets to competition.

The commission took no action to toughen its orders to Microsoft on its Windows Media Player software for audio and video, a blow to Microsoft rival RealNetworks Inc., which offers competing media software.

For its part, Microsoft offered more-flexible licensing terms covering programming information that its rivals need to compete in the office-networking market. Microsoft also acknowledged that not all of its programming is innovative enough to justify royalty payments.

The contours of the deal still could change over the next two weeks as regulators seek input from Microsoft opponents. But it represents an important breakthrough in negotiations that had become increasingly acrimonious since a ruling last year in which the E.U. fined Microsoft about $600 million for abusing its dominance in the marketplace and demanded the software maker change some business practices to give rivals a better chance to compete.

Microsoft's general counsel, Brad Smith, called the agreement a "positive step forward" for both sides. The company has agreed to license its software code for use world-wide, not simply in Europe. Microsoft will make it easier for programmers to evaluate information to determine whether to license it, Smith said in an interview.

The E.U. also gave an upbeat assessment. "I am happy that Microsoft has recognized certain principles which must underlie its implementation of the commission's decision," E.U. antitrust commissioner Neelie Kroes said in a prepared statement. "This includes the ability for developers of open-source software to take advantage of the remedy."

Even so, the central issue remains unresolved over whether such "open source" software companies, whose offerings can be used by others at low or no cost, can incorporate Microsoft code into their own products without placing restrictions on users. Regulators agreed to let a European court that is already reviewing Microsoft's appeal of the case decide the contentious question, a process that could take years.

Other elements also were still to be worked out. Microsoft has agreed to provide free some added access to its programming information to rival programmers, regulators said -- but which information qualifies hasn't been agreed on. The two sides also have yet to agree on an independent arbitrator to decide further disputes.

The commission didn't order Microsoft to lower the price on a version of its Windows personal-computer operating system without its media software attached, as RealNetworks had urged. Without a price difference, computer makers have said they are unlikely to install the unbundled version of the operating system.

Dave Stewart, deputy general counsel for RealNetworks, said he believed regulators would eventually take more action to restore media-player competition. Even if they don't, "these are not issues that threaten RealNetworks' viability," because the Seattle-based company's revenue now comes primarily from games, music and other consumer services, Stewart said.

Microsoft will offer flexible licensing terms and package deals so companies pay only for the programming code they need to make their own office-networking software work well with Microsoft products, said Smith, the general counsel.

But Microsoft foes were unhappy about the holes that have to be filled in. "Discussing the exact terms is going to take decades and armies of lawyers -- with time playing for Microsoft," said Georg Greve, president of the Free Software Foundation Europe, a group representing open-source programmers that had advised the E.U. regulators.

Cassell Bryan-Low in Paris contributed to this report.

European Union antitrust commissioner Neelie Kroes and Microsoft General Counsel Brad Smith helped broker a compromise regarding penalties arising from a 2004 E.U. ruling.