Microsoft yesterday escalated its battle with arch rival Google, reacting to an assault on one of its core businesses with the announcement of a free online version of its widely used Office software, to be launched next year.

While likely to take only a small bite out of Office revenues in the short term, the move represents one of the most radical steps yet by Microsoft as it tries to refocus its software business around the internet, according to analysts.

Users of the free online Office will be able to create and edit documents, spreadsheets and Powerpoint presentations by using tools they are familiar with from the desktop software. Although only a “lightweight” version of the software, to make it more suitable for use in internet browsers, it would still provide a fuller service than online rivals such as Google Apps, said Stephen Elop, head of Microsoft's Business Division.