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Microsoft is to slash the price of Windows XP for low-cost laptop makers, as it aims to see off the threat of Linux in the budget market. But the software maker will apply strict limits on the hardware that can run the discounted OS.

It will charge PC manufacturers $26 (£13) to have Windows XP Home preloaded on machines sold in emerging

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markets and $32 (£16) for those sold in developed markets, according to documents seen by PC World. And manufacturers could get as much as $10 more off of those prices if they are eligible for Microsoft's market development scheme, potentially reducing the price of the XP licence to as little as a few pounds.

However they will have to abide by Microsoft's parameters on hardware specification. Machines may have screens no larger than 10.2in, cannot have touchscreens and hard disks must be no larger than 80GB.

Microsoft plans to phase out mainstream sales of Windows XP on 30 June and doubtless these limits are designed to prevent canibalisation of Vista sales.

Linux, which has so-far dominated the budget market, has no such restrictions.