ANALYSIS-Google-Microsoft war may bring down PC prices

* Microsoft could cut prices to respond to Google-analysts

* Google's move could help margins at PC vendors

By Gabriel Madway

SAN FRANCISCO, July 8 (Reuters) - Google Inc's (GOOG.O) bid to compete with Microsoft Corp's (MSFT.O) Windows operating system may help lower the cost of personal computers at a time when prices are already being pinched by inexpensive netbooks.

Analysts expect Google to offer its just-announced Chrome Operating System for a small fee or for free when it is launched in the second half of 2010, a move that could force Microsoft into a price war.

Although Windows is the dominant operating system -- installed on 90 percent of the world's PCs, Microsoft won't take Google's challenge lightly, analysts said. Its new Windows 7 operating system will be available in October.

"Microsoft's strategy is likely to be to compete on price," said Brent Williams, an analyst with the Benchmark Co. "Now there's a competitor with the muscle and the brand recognition. Google is that company."

Google said Chrome OS, which is based on the open-source Linux code, is being designed for all PCs but will debut on netbooks. It makes sense for Google to initially target the stripped-down, Web-centric netbooks, one of the only segments showing any growth in a PC market that is contracting.