The warning from the European Commission follows an investigation launched in July.
"We have reached the preliminary conclusion that Microsoft breached its commitments to provide Windows users with a choice screen between Internet browsers," Joaquin Almunia, competition commissioner for the European Commission, said.
Microsoft has four weeks to respond or risk a fine of as much as 10 percent of revenue, CNN Money reported.
Microsoft's sales last year totaled nearly $70 billion, CNN said.
The software giant has apologized for the violation, which it characterized as an inadvertent error.
"We sincerely apologize for this mistake and will continue to cooperate fully with the Commission," the company said Wednesday in a written statement. "Although this was the result of a technical error, we take responsibility for what happened, and we have taken steps to strengthen our internal procedures to help ensure something like this cannot happen again."
Under an agreement with the European Commission, as of March 2010 a "choice screen" was supposed to pop up when a user was setting up Windows, displaying 11 different browsers to choose from, including Microsoft's own Internet Explorer.
The choice screen was missing when Microsoft issued a Windows 7 update called "Service Pack 1" in February 2011.