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Chris Stephenson, general manager of market for entertainment and services at Microsoft, declined to elaborate, and would not say what interest had been shown in the portable music player and accompanying digital music service. It is widely reported that the company has already demonstrated the products to music industry executives.

'Under the Zune brand, we will deliver a family of hardware and software products, the first of which will be available this year,' Stephenson said in an statement. 'We see a great opportunity to bring together technology and community to allow consumers to explore and discover music together.'

Microsoft spokeswoman Katy Gentes later confirmed that Zune will adopt 'a similar model' to iTunes.

Jupiter analyst Michael Gartenberg told AP that Microsoft executives have privately indicated to him that the player will be a wireless device that plays both music and video.

While

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Zune is unlikely to threaten Apple's dominance of the market - both iPod and iTunes have more than 70 per cent of their respective markets - it does pose a challenge to smaller services, notably Napster and possibly Yahoo! Music and RealNetwork's Rhapsody. Unlike Apple and, to a lesser extent, Sony, these services do not enjoy the advantage of being exclusively tied to a leading-brand digital music player.

Similarly, portable player manufacturers whose place in the market is reliant on licensing Microsoft's Windows Media DRM technology must be less than impressed.

'If you're the head of Creative, as of this afternoon you're not just facing Apple, which was bad enough, you're now facing your partner,' Gartenberg said.

He added that any impact on the fortunes of other companies could have wider implications, as it may make firms on other markets more wary of partnering with Microsoft, threatening its traditional business model.

'It's certainly going to cause a lot of fear and uncertainty and doubt in the ecosystem,' he said.

As we reported earlier this month, the Zune project is in-part being led by J Allard, vice president of Microsoft's Xbox team, and one of the few Microsoft execs with the experience of successfully launching a consumer electronics device. As a number of commentators, including Gartenberg, have noted, Allard's brief may not be concerned with usurping the iPod's music hegemony, but with ensuring that Apple is not allowed the same freedom when it comes to delivering movies to people's living rooms.