As the release of low-cost laptops based on Intel's upcoming Atom processor draws near, Microsoft is getting boxed into a corner. The software company plans to stop selling most Windows XP licenses after June 30, yet most of these low-cost laptops won't be powerful enough to run Vista when they arrive later this year.

That leaves Microsoft executives with a choice: Do they extend the availability of Windows XP for low-cost laptops (as they are rumoured to be doing), or possibly concede this nascent market to Linux?

The poster child for the low-cost laptop is Asustek's £200 Eee PC, which hit the market in October last year and runs the Xandros distribution of Linux. Consumers have embraced the laptop, which uses a version of Intel's Celeron M processor, for its small size and ability to perform basic tasks like Web surfing and e-mail. It became something of an overnight sensation, and that success caught the attention of other hardware makers, including top-tier PC vendors.

The Eee PC's success wasn't possible without Intel's support. The chip maker was initially hesitant to embrace Asustek's push into low-cost laptops for fear it would drive down margins for its mobile processors if users opted to buy low-cost laptops instead of more powerful - and more expensive - models. But Intel eventually decided that the opportunity to expand the size of the overall laptop market outweighed the risks of lower profit margins, and gave its backing to the little laptops.

Intel's support for low-cost laptops is ready to shift into overdrive. The company's upcoming line of Atom processors, relatively inexpensive chips that consume little power, will show up during the third quarter in small laptops - priced in the US from $250 to $300 - that will be aimed at users in developed markets and heavily promoted by the chip maker. Intel executives want these laptops to be cheap enough that US and European consumers don't think twice about buying them as a second computer. Most are planned to ship with either Linux or Windows XP, even though they will arrive after Microsoft's June 30 deadline has passed.