Various published reports on Friday indicated that talks between the government and the software giant are nearing some type of resolution, but the terms of a possible settlement remained unclear.

According to USA Today, Microsoft is expected on Friday to make a far-reaching offer to settle the case as prosecutors step back from demands that the software giant be broken up.

If Microsoft's proposal is sufficiently broad, it could result in top-level negotiations this weekend in Chicago, the paper said. The talks might even include Microsoft Chairman Bill Gates, Assistant U.S. Attorney General Joel Klein and Judge Richard Posner, who has been serving as mediator.

But if the proposal is deemed too narrow by the government, it could doom the four-month-old negotiations and place the case back with U.S. District Court Judge Thomas Penfield Jackson, USA Today said.

A spokesman for Microsoft was not immediately available to comment on the report.

Meanwhile, the Washington Post reported today the Justice Department intends to present Posner with a new settlement proposal this weekend. The paper also said that four states — Florida, Maryland, Kansas and Ohio — are no longer certain that breaking up Microsoft is the right thing to do.

And for its part, the Associated Press simply said the federal government may be backing away from demanding the break up of the software maker.

The move represents a fundamental shift by the Justice Department, which largely decided months ago to press for a breakup while anticipating a strongly favorable ruling from Judge Jackson in the coming weeks.

It also puts Justice's stance at odds with some state attorneys general, who believe that only the harshest punishment is appropriate.

Microsoft has indicated it will not accept any settlement that divides the company, and Klein believes such a punishment may not be necessary to adequately restrain what the trial judge characterized as Microsoft's monopoly power over the technology industry, said two people close to the case, speaking on condition of anonymity.

New York's attorney general, Eliot Spitzer, on Thursday praised Klein's handling of the antitrust trial but acknowledged that past cooperation between states and Justice "doesn't mean we're going to agree on every piece, every remedy."

Spitzer, who declined to comment on settlement talks, described a "healthy dynamic" among the 19 states and Justice debating punishments.

Word that negotiators may be nearing a settlement that does not involve the breakup of the world's largest software company sent shares of Microsoft about 8 percent higher on Thursday. They closed up 8-5/8 at 111-7/8 in heavy trading on Nasdaq, and were up another point on Friday.

Antitrust experts offered several explanations why Justice now may be inclined to accept lesser punishment than a breakup as part of a settlement, even though the trial judge strongly has hinted he will rule that Microsoft violated antitrust laws.

Punishment worked out under settlement could apply immediately to Microsoft — even before the next election — without the uncertainty over the outcome of lengthy appeals. Government lawyers also could negotiate a punishment broadly enough they would apply to controversial practices that were not part of the current trial, such as Microsoft's dominance in Internet "server" software and in the market for word processors and spreadsheets.

"What Justice has to balance is the benefits in the short run of having a settlement that might apply arguably to some things more long term that haven't been litigated, against the more certain relief of a structural divestiture that Microsoft would oppose," said Glenn B. Manishin, an antitrust lawyer who advocates breaking up Microsoft.

The Justice Department also faces an apparent dearth of support among the public and the technology industry to break up Microsoft, as well as active debate among some attorneys general on their best course.

Jackson bluntly told government lawyers in November that he would "not like to have to deal with divergent points of view" on proposed punishments. Ohio's Betty Montgomery, for example, said earlier that lawyers should seek prohibitions on Microsoft's conduct, not a breakup.

Microsoft has indicated it would never agree to any settlement that included a breakup; the company's chief executive, Steve Ballmer, called those proposals "reckless and irresponsible."

The first surprise suggestions that a settlement might be possible came earlier this month after prominent financial analysts met privately with Microsoft's new financial officer.

Walter Winnitzki of Chase Hambrecht & Quist said afterward that he believed "there was a near-term opportunity to have this settled, some language being given that they wouldn't have any change in culture or structure."

But there also remain signs of continued acrimony. Sounding far from placated, Klein told a Senate subcommittee this week that any remedy "ought to be commensurate" with Microsoft's aggressive business practices.

Also, Microsoft e-mailed a newsletter to thousands of subscribers Wednesday harshly critical of the government. It described as "unseemly at best" Justice's efforts to persuade industry leaders to support a breakup. It also derided breakup plans as "an extreme and reckless resolution to the government's antitrust suit."

— The Associated Press and Reuters contributed to this report