In its Sunday edition, the Seattle times said the idea for a forced auction of Windows licensing rights was one of several proposals the attorneys general will take to a negotiating session with Microsoft executives Tuesday.
But a Microsoft executive involved in the negotiations said the states' plan was a non-starter.
"I have seen a lot of legal experts quoted as saying that's pretty ridiculous," said the official who asked to remain unidentified. "It's clear that this is not some counter proposal. It was white paper written a while ago."
It also marks the first time since the start of the trial last spring that the states have taken back the initiative. Although they had their requisite 15 minutes of fame in the weeks leading up to the filing of the antitrust lawsuit in May 1998, they have since taken a back seat to the Justice Department and its lead lawyer, David Boies.
Under the reported proposal, presented as the best way to redress what Microsoft's critics see as past abuses of its monopoly power, intellectual property rights to Windows 95, Windows 98 and Windows 2000 would be sold to two or three companies.
Microsoft would retain the right to market and develop its own versions of the software, and Microsoft shareholders would get ``reasonable compensation.''
``The proposal would actually break up and render impotent the Windows monopoly, which is the source of Microsoft's power,'' the state report concluded, according to the newspaper.
If a forced auction is unacceptable, the states say their goal could be attained by demanding that Microsoft make Windows available publicly on an ``open source'' basis to third-party developers or at least disclose certain parts of the source code.
Microsoft, which tightly guards source code to its products, would ``retain the right to charge a reasonable licensing fee'' for any third-party use of the intellectual property, according to the states' report.
The state report also lists the idea of breaking up Microsoft into several companies as an option, although it notes several drawbacks to that idea, the newspaper said.
Microsoft has made an initial settlement proposal, under which it would change the way it licenses software to computer makers and Internet companies, that has been rejected as inadequate by at least some state attorneys general.
In the meeting Tuesday, which will include representatives of the U.S. justice Department, states will demand that Microsoft go further in an effort to open the operating system market to other competitors, according to the report.
U.S. antitrust regulators joined by 19 states, sued Microsoft in May, charging the Redmond, Wash.-based company had abused its monopoly power to expand its dominance into new markets including the Internet.
A trial that began in October went into a lengthy recess last month, but not before U.S. District Judge Thomas Penfield Jackson admonished all parties to seek a settlement before final witnesses take the stand beginning sometime in April or May.
Reuters contributed to this report.