Microsoft has revealed that it will be cutting prices for the upcoming Windows Vista SP1 release.

In a statement provided to vnunet.com, the company said that the cuts would effect the Home Premium and Ulitmate versions of Vista.

The cuts will vary by country, but Microsoft plans to pursue two different strategies for developed and emerging economies.

In wealthier countries, the prices for the upgrade versions of the two operating systems will be slashed.

In the US, the Home Premium upgrade will reportedly be cut to $129, while Vista Ultimate will drop to $219. Elsewhere in the world, the cuts could range from 20 to 40 per cent.

In developing nations, Microsoft plans to eliminate the upgrade distinction and sell the full version of the operating system at a lower price.

The company hopes that the move will encourage more first-time PC buyers in these countries to opt for Vista rather than XP.

The move will not, however, affect the biggest market for Windows: PC manufacturers. The price which manufacturers pay to pre-install Vista on their machines will remain the same.

"Today, the vast majority of Windows licences are sold with PCs. Retail standalone sales, in contrast, have been primarily from early adopters and those building their own machines," explained Brad Brooks, corporate vice president for Windows consumer product marketing.

"We have observed market behaviour, however, that suggests an opportunity to expand Windows standalone sales to other segments of the consumer market."

The announcement of the price cut comes as Microsoft defends itself against a class-action lawsuit in Washington as a new crop of emails implies that the company knowingly labelled incompatible machines as Vista Ready.