The EU Court of First Instance ruled against Microsoft on both parts of the case, saying the European Commission was correct in concluding that Microsoft was guilty of monopoly abuse in trying to use its power over desktop computers to muscle into server software.
It also said regulators had clearly demonstrated that selling media software with Windows had damaged rivals.
"The court observes that it is beyond dispute that in consequence of the tying consumers are unable to acquire the Windows operating system without simultaneously acquiring Windows Media Player," it said.
"In that regard, the court considers that neither the fact that Microsoft does not charge a separate price for Windows Media Player nor the fact that consumers are not obliged to use that Media Player is irrelevant."
But it did overturn regulators' decision to appoint a monitoring trustee to watch how Microsoft had complied with the ruling, saying the Commission had exceeded its powers by ordering Microsoft to pay for all the costs of the trustee.
Microsoft, which made $14.07 billion in profits during its last fiscal year, can appeal the decision to the EU's highest court, the European Court of Justice, within two months.
"I don't want to talk about what will come next," said Microsoft lawyer Brad Smith in answer to questions about the possibility of an appeal. "We need to read the ruling before we make any decision."
The mood at EU headquarters was one of elation and the court's decision was hailed as a big victory for the EU's competition policy and for consumer rights.
"The ruling confirms more than ever that Microsoft must comply," said EU Competition Commissioner Neelie Kroes. "I will not tolerate continued noncompliance."
Kroes said however that the victory did not yet mean that software customers have more choice than they did three years ago, when Microsoft was slapped with the original EU fine.
"The court has confirmed the Commission's view that consumers are suffering at the hands of Microsoft," she said.
She refused to say what the implications of Monday's decision would have on other ongoing legal fights between the EU and Microsoft.
The European Committee for Interoperable Systems called the ruling a good result.
"It's a very good day, for it signals that there will be fair competition for the sector," said Maurits Dolmans, a lawyer for the group.
In its 248-page ruling, the court upheld both the Commission's argument and its order for Microsoft to hand over information on server protocols to rivals. Microsoft had claimed these were protected by patents and the Commission was forcing it to give away valuable intellectual property at little or no cost.
The court confirmed "that the necessary degree of interoperability required by the Commission is well founded and that there is no inconsistency between that degree of interoperability and the remedy imposed by the Commission.
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