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The talks broke down last year before the software giant signed a deal with rival Linux distributor, Novell, according to Red Hat's chief executive Matthew Szulik.

A deal with Red Hat would be a significant coup for Microsoft, which has already signed patent agreement deals with LG, Xandros and Linspire. Intriguingly, Szulik declined to say whether his company is continuing negotiations with Microsoft. "I can't answer the question," he said.

Officials with Microsoft couldn't be reached for comment.

Patent dispute

In May, Microsoft made a broad claim that open-source programs, including Linux programs from Novell and Red Hat, violate 235 of its patents.

As part of their November 2006 business partnership, Microsoft agreed not to sue Novell customers for any patent violations that might come up as a

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result of their use of Novell's Linux software.

Microsoft has since urged other open-source software companies to enter into similar patent agreements.

If Red Hat, a distributor of Linux software for business computers and the world's largest open-source software company, were to enter into a patent agreement with Microsoft it would risk losing the right to distribute key parts of the Linux operating system.

Much of the code in its flagship product, Red Hat Enterprise Linux, is distributed under the terms of a licensing agreement known as the General Public License, version 2.

An update to that license, version 3, is about to be implemented. It will forbid companies from distributing Linux software if they enter into patent agreements like the ones that Microsoft signed with Novell.

The Free Software Foundation, which authored the General Public License and owns rights to much of the code at the heart of Red Hat Enterprise Linux, inserted that clause into the agreement in an effort to discourage other open-source software developers from signing patent deals with Microsoft.

The authors of that license have said they believe that such patent deals will help Microsoft back claims that its intellectual property is being violated by code in Linux and other open source software, eventually giving the company ammunition to seek billions of dollars in license fees from users of open-source software.