Music is played from a device plugged in through a USB port. The system can play audio from a range of devices and in a variety of formats, including Windows Media and MP3. It also connects to iPods to play tracks that aren't encoded in Apple's protected AAC format.

A team on Microsoft Corp.'s Redmond campus has been running tests with one of the swankiest machines ever to use the company's software.

Microsoft's automotive technology is available in different forms through electronics suppliers, but the Fiat agreement is the first of its kind directly between Microsoft and an auto manufacturer. The software company hopes it will lead to deals with others.

"Our goal is to achieve very, very high volumes," said Mark Spain, senior director of Microsoft's Automotive Business Unit. "We believe that these experiences are relevant to a large part of the worldwide market of car drivers and passengers."

But Microsoft faces no shortage of competitors, ranging from General Motors' OnStar subsidiary to smaller players in the automotive telematics market, the industry term for in-car electronics systems.

In one possible sign of the challenge the company faces, Microsoft hasn't announced any other deals with automakers since reaching the agreement with Fiat in July 2004 that led to this week's rollout. Considering Microsoft's dominant position with PCs, some automakers may be less than eager to give it more clout by adopting its software for their in-car entertainment and information systems.

"I think there's an element of that," said Phil Magney, president and principal analyst at Telematics Research Group in Minnetonka, Minn. Automakers are "just very cautious about it."

Representatives of Microsoft's Automotive Business Unit showed how to wirelessly connect a phone to the computer system, scroll through the phone's contacts on a small screen built into the car's instrument panel, and make calls through small overhead microphones, using voice commands.

Music played from a device plugged in through a USB port. The system can play audio from a range of devices and in a variety of formats, including Windows Media and MP3.

It also connects to iPods to play tracks that aren't encoded in Apple's protected AAC format.

When a call came in to the mobile phone, the system identified the caller and automatically lowered the volume of the music so the driver could take the call.

Fiat will offer the system under the name "Blue&Me," a reference to the ability to link a mobile phone to the system using Bluetooth wireless technology.

The system will be an option in the first wave of cars from Fiat but standard in some future models, Microsoft's Mark Spain said. Fiat hasn't announced the price for the system, but industry analyst Magney said he would expect a price of slightly less than 300 euros, or around $350.

Magney said that would be "very competitively priced."

The software doesn't control operation of the vehicle itself, just the "infotainment" system, as it's called.

In some circles, Microsoft might still need to overcome some negative perceptions. People who have had spotty experiences over the years with the company's PC software might not want its technology in their cars.

But Velle Kolde, product manager in Microsoft's Automotive Business Unit, called the Windows connection a selling point. Versions of Windows run everything from mobile devices to industrial systems.

"We are very proud of the reliability and stability of our operating system," Kolde said.

Fiat is expected to highlight the Microsoft connection, putting a small Windows logo inside the cars that include the system. Microsoft said that's the automaker's prerogative, not anything the software company requires.

Initially, the Blue&Me system is expected to be available in the Fiat Grande Punto, and the Alfa Romeo 159, Brera and Spider models.

Fiat doesn't sell the cars in the United States, but the company is reportedly considering bringing the Alfa Romeo back to this country at some point.

An advanced version of the system, expected to be available in some future Fiat models, will let drivers get directions and navigate with a global positioning system, using capabilities in the Microsoft software.

Other features will include the ability to respond to text messages using speech recognition.

The Windows Mobile for Automotive technology also opens up the possibility of connecting to online services, using the phone to access the Internet. The system is designed to be updated as new cell phone or device technology comes out.