It has been like a feud simmering between two street fighters. For months Microsoft and Google have been circling each other, exchanging taunts. Now they have moved in and started brawling.

Google has announced that it will soon release a fully fledged operating system — the software that acts as the brains of any computer — that could well replace Windows as the choice of most consumers. This new software, to be known as Chrome OS (and not to confused with Google’s existing Chrome web browser), is optimised to run on the new range of low-cost, slimmed-down laptops, or netbooks, that have taken the market by storm. Because it will be free, Chrome OS will lead to cheaper computers: manufacturers will not be passing on the cost of pre-installing Windows, which is typically at least £50 and can be as much as £150. Last month about 92% of netbooks sold in the UK came with Windows installed, according to Microsoft.

The move marks a new escalation of the bitter turf war between the two technology giants. In the past few years, Google has released a range of free software, such as e-mail, word-processing and spreadsheet programs, that has undermined Microsoft’s ability to sell its own, lucrative Office package. Perhaps in retaliation, last month Microsoft ventured more aggressively into Google’s territory with a new search engine called Bing.

The announcement of Chrome OS takes the war to the core of Microsoft’s business. The latter’s Windows software is used to run the vast majority of the billion or so PCs in the world. Another billion computers are expected to be bought in the next five years. If Google’s system is supplied on many of those machines — and the company has already announced tie-ups with big hardware manufacturers such as Asus and HP — the amount of revenue that Microsoft could be denied is vast. Windows is still its cash cow, its biggest single product, worth about £9 billion a year, a quarter of its total global revenue, and the latest version, Windows 7, due in the autumn, is said by some to have been specifically written for the netbook market now targeted by Google.

Google insists Chrome OS will be more than stripped-down freeware, saying instead that it will lead to a new age of quicker and simpler everyday computing. “We hear a lot from our customers and their message is clear — computers need to get better,” the company stated in its announcement. “People want to get to their e-mail instantly, without wasting time waiting for their computers to start up.”

The way Google intends to speed up those operations is by building programs that run from inside a web browser, much like its existing Google Mail and Google Docs services. Even so, Google promises that Chrome OS will be more secure than programs running on your own laptop, and will continue to run when you are offline.

So is the game up for Microsoft, the firm founded by Bill Gates in a garage, which has seemed invincible for so many years? Not necessarily. Despite even Google’s lavish development resources — its in-house labs are often compared to Willy Wonka’s chocolate factory — the firm admits Chrome OS is far from finished and is little more than a wish list of ideal features. It won’t arrive until late 2010.

What is more, computer users are a conservative lot. They like what they know and, by and large, they know Windows — and are used to its many foibles. And many people will have already paid for a tranche of software that will not run on another system.

The real question is what is in it for Google — why is it prepared to take on a firm with a multi-billion-pound war chest? “Call it enlightened self-interest,” Google said. “The better people’s experience is of using their computer, the more time they will spend online and the greater the chances are of them clicking on our adverts. After all, a rising tide lifts all boats.”