The computing giant has admitted that it has "fallen short" of meeting the terms of an antitrust settlement brought about in 2009 following complaints from rival browser developers.
Competition Commissioner Joaquin Almunia said that Windows 7 users were not made aware of the third-party options available, such as Google's Chrome and Mozilla's Firefox, and warned that Microsoft could be hit with a stiff penalty if such allegations are proven in a formal investigation.
Microsoft claims that the antitrust breach occurred due to an error in Windows 7 update service pack 1, which caused the Browser Choice Screen (BCS) to display only one choice.
"The Commission recently told us that it had received reports that the BCS was not being displayed on some PCs. Upon investigating the matter, we learned of the error," said Microsoft in a statement.
"The BCS software has been delivered as it should have been to PCs running the original version of Windows 7, as well as the relevant versions of Windows XP and Windows Vista.
"However, while we believed when we filed our most recent compliance report in December 2011 that we were distributing the BCS software to all relevant PCs as required, we learned recently that we've missed serving the BCS software to the roughly 28 million PCs running Windows 7 SP1."
Mozilla boss Harvey Anderson hit out at the firm following reports that its own Internet Explorer will be given special privileges for the ARM version of OS, making it the only browser able to run in 'Classic' mode.
The European Commission has powers to hand out fines of up to 10% of a company's annual revenue, which in Microsoft's case was $70 billion during the last fiscal quarter.