Microsoft is prepared to bend prices on its Windows operating system in order to keep government and multinational company accounts from wandering into the open-source Linux camp.

The German Interior Ministry has signed a licensing agreement with Microsoft to receive favourable conditions for both buying and leasing the company's software products.

The agreement will save federal, state and local governments "much money", according to Interior Minister Otto Schily.

The deal comes just weeks after Microsoft's CEO, Steve Ballmer, paid a visit to government officials in Germany.

Microsoft has been scrambling to find ways to retain huge public sector software contracts in Germany ever since the government, in an effort to lower costs and increase security, agreed last year to a partnership with IBM for the delivery of Linux-based computers to federal, state and local governments.

The German government is keen to have Microsoft software co-exist with rival products, according to the Interior Ministry. "Our strategy is to combine the world of the commercial software companies with the world of open-source providers," states Schily.

Under the agreement, German government agencies can acquire Microsoft software at favourable rates without having to commit themselves to using the company's products exclusively.

A Ministry spokeswoman declined to comment on the new pricing scheme.

Microsoft has also agreed to publish specifications for interfaces and data formats in addition to supporting open standards in its products, according to a Ministry statement. These assurances will give the agencies greater flexibility in building their IT systems, it said.