Both Redmond, Washington-based Microsoft and RealNetworks make so-called streaming media software for receiving audio and video over the Internet. RealNetworks software is among the most widely downloaded on the Internet, with some 35 million registered users and another 600,000 copies downloaded weekly.

Last year, Seattle-based RealNetworks forged a deal with Microsoft to integrate its technology with Microsoft's Internet Explorer browser, but that alliance collapsed amid bitter recriminations. The companies have since begun to carve out divergent strategies for distributing media via the Internet.

"Microsoft owning a stake in its competitor in this area did not quite seem to be the best course, so they decided to sell it," said Ron Rappaport, an analyst at ZonaResearch. "It comes down to this: Does Coke own a stake in Pepsi?"

Based on RealNetworks' closing stock price on Wednesday of $42.875, down $1.625, on Nasdaq, Microsoft's stake of 3.34 million shares is valued at $143.2 million. In after-hours trading, however, RealNetworks stock fell to $35 on Instinet.

Microsoft took the RealNetworks stake in July 1997 for $8.99 a share, Microsoft chief financial officer Greg Maffei said in an interview.

"The stake just doesn't make sense since we're not working together and cooperating in the partnership in the same way that we once were," Maffei said.

RealNetworks agreed.

"It (the Microsoft move) makes a fair amount of sense and is no surprise at all," RealNetworks chairman Rob Glaser said in an interview. "We feel very optimistic about our ability to maintain market leadership share against any competitor."

RealNetworks makes its basic players available for free, hoping to drive demand for the lucrative back-end software needed by companies that want todistribute audio and video content over the Internet and internal computer networks.

In recent months, RealNetworks has announced a succession of deals with other companies, including Microsoft's archival Netscape Communications Inc.

It also has forged alliances with America Online Inc. and International Business Machines Corp.'s Lotus Development.

Some 85 per cent of the media sent over the Web is done using RealNetwork's technology, said John Powers, an analyst at BancBoston Robertson Stephens, who tracks RealNetworks.

RealNetworks stock also plunged in July when Glaser -- a former Microsoft executive -- testified before the US Senate, claiming that Microsoft disabled its product and that it designed software designed intentionally to do so.

Microsoft countered that the problem with running RealPlayer on Microsoft's Windows operating system was a bug in RealNetworks' software, not Windows itself.

"Anytime Microsoft does something that's perceived as negative to another company, the stock willget decimated," Powers said. "But the partnership with Microsoft was never a substantial part of the success of RealNetwoks."

Maffei said Microsoft sent a letter June 24 to RealNetworks indicating its preference to sell its stake through a stock offering to the public. While RealNetworks initially expressed interest, Maffei said it later backed away from the offering.

How long it takes Microsoft to dispose of the stake will depend on market conditions, as well as the volume of RealNetworks stock that is traded each day to allow for selling of such a large position without the stock falling precipitously and hurting Microsoft's profits on the sale.

Microsoft stock fell $2.13 to $109.75 on Nasdaq. The company announced the news after the close of regular trading.