MP3, a popular format for downloading music from the Web, is encountering competitive pressure as leading technology companies such as Microsoft Corp. work to subtly wean consumers away from the technology. Microsoft, for example, plans to severely limit the quality of music that can be recorded as an MP3 file using software built into the next version of its personal-computer operating system, Windows XP. But music recorded in the Redmond, Wash., software company's own format, called Windows Media Audio, will sound clearer and require far less storage space on a computer. Under Microsoft's new restrictions--which prevent its built-in software from recording MP3 files at fidelity rates higher than 56 kilobits per second -- MP3 music "sounds like somebody in a phone booth underwater," says P.J. McNealy, an analyst who researches Internet audio issues for Gartner Inc. in Stamford, Conn. (Existing versions of Microsoft's audio software don't allow consumers to record music as MP3 files of any quality.) The new restrictions in Windows XP won't prevent other vendors' software applications from recording MP3 music at a higher fidelity, but early testers of beta versions of Windows XP already complain that the most popular MP3 recording applications -- which compete with Microsoft's format -- don't seem to function properly, apparently because of changes Microsoft made to how data are written on CD-ROMs under Windows XP. Microsoft says that while other software vendors' products may not be "optimized" to run with Windows XP, those products should run acceptably with the operating system. Microsoft said its decision not to include built-in support for recording better-sounding MP3 music also avoids it having to pay license fees required by Thomson Multimedia SA and the Fraunhofer Institut, which collect at least $2.50 from software vendors for each copy of recording software based on their MP3 technology.