The European Commission said the US company had broken a legally binding commitment made in 2009 to ensure consumers had a choice of browser, rather than defaulting to Microsoft's Internet Explorer.
An EU investigation found that Microsoft had failed to honour that obligation in software issued between May 2011 and July 2012, meaning that 15 million users were never made aware that they could choose.
"Legally binding commitments reached in antitrust decisions play a very important role in our enforcement policy," said JoaquÍn Almunia, the EU's competition commissioner.
"A failure to comply is a very serious infringement that must be sanctioned accordingly."
The fine is the first time the European Commission has fined a company for non-compliance with agreed commitments. It could have charged Microsoft up to 10% of its global turnover, or as much as €6 billion.
In that respect, the fine is relatively light, but still marks a firm sanction by the EU and will not go unnoticed by the likes of Google, which is involved in a dispute with the Commission over how it ranks search engine results.
Google is under pressure to offer concessions to prevent the antitrust authority moving to the next stage in the case, which could involve fines. Other major technology firms are also in the Commission's crosshairs in other cases.
Microsoft has a long and bitter relationship with the EU's powerful antitrust authority, which has now issued fines totalling €2.16 billion against the US firm.
In 2004, the Commission found that Microsoft had abused its dominant market position in relation to the tying of Windows Media Player to the Windows software package and imposed fines.
Then in 2009, in order to resolve other competition concerns, Microsoft undertook to offer users a browser choice screen allowing them to download a browser other than Explorer.
The Commission made that obligation legally binding for five years, until 2014, and initially the company complied. From March 2010 until November 2010, 84 million browsers were downloaded via the screen, the Commission said on Wednesday.
But the Windows 7 service pack 1 rolled out between mid-2011 and mid-2012 failed to offer the choice, leading to the investigation that resulted in Wednesday's fine.
Microsoft has said the failure was the result of a technical error and that procedures have since been tightened.
In what was seen as an acknowledgement of the severity of the mistake, the board cut the bonus of chief executive Steve Ballmer last year, according to company's annual proxy filing.