However, Microsoft denied the report and other experts differed on the magnitude of the alleged problem.
The chief scientist at an Internet security company said Microsoft built in a "key" for the nation's most powerful intelligence agency to the cryptographic standard used in Microsoft Windows 95, Windows 98, Windows NT4 and Windows2000.
To use cryptographic applications in Windows, users must load its cryptography architecture in a standard called CryptoAPI.
A year ago, researchers discovered there were two keys, or digital signatures, that allowed the loading of CryptoAPI -- Microsoft had one but the identity of the other keyholder was a mystery.
Andrew Fernandes of Ontario-based Cryptonym and his colleagues now say the NSA holds the second key because they found that a recent service pack for Windows NT failed to cloak the second key, revealing it as "_NSAKEY."
"In the data security profession, those three initials only mean one thing: National Security Agency," Fernandes said.
Microsoft denied that the key belongs to the NSA, saying instead that the "_NSAKEY" label simply means the cryptography architecture meets the NSA's standards for export.
"These reports are completely false," said Microsoft spokesman Dan Leach.
"The key does not allow any other party to start or stop cryptographic services on anyone's computers.
"So no, the government cannot spy on your computer using Microsoft software. We don't intentionally leave backdoors. Microsoft has consistently opposed key escrow because we feel it is no good for the consumer, for Microsoft and no good for the government. These reports are entirely false!"
Fernandes said the NSA key would allow the intelligence agency to load services on users' machines without their authorization, an option it more likely would use against a corporation than an individual.
Fernandes posted a "fix" to the key on his Web site Friday, along with a press release announcing his report on the second key. The NSA failed to return comment on the key.
The alleged NSA key came to light just days after Microsoft squelched
a breach to its Web-based e-mail service, Hotmail.
The statement by Cryptonym Corporation is "a small deal at least." The only problem he found with the CryptoAPI architecture is that if a Windows systems has a virus, it may make the virus more destructive.
It could be that NSA is making it easier to manage their own computers,
Wagner said. Users of Windows 95/98/NT systems should not infer that the
NSA is able to spy on any computer using a Windows operating system.
The discovery "highly suggests" that the NSA has a key it could use to enter encrypted items on anybody's Windows operating system, said Ian Goldberg, chief scientist at Zero-Knowledge Systems.
Zero-Knowledge Systems is about to release a security product built specially to make such security flaws impossible, he said.
Fernandes said the evidence shows that the NSA is involved in the key but it fails to indicate who owns the key. Even if Microsoft claims the key is its own, Fernandes said he believes the key was put in the Windows products at the request of the NSA.
"They've got their hand in the cookie jar and they're trying to convince you they aren't taking a cookie, they're checking to make sure there's lots of cookies left for you," Fernandes said.
Fernandes, who came up with his results in collaboration with the Berlin-based Chaos Computer Club, said it comes down to an issue of trusting Microsoft.
The security flaw does not give hackers an entrance to Windows-based cryptography services, Fernandes said, because hackers lack the private key.
He called for Microsoft to be more honest about its security infrastructure
and the "deal they had to cut with the government to allow the exportation
of cryptography in Windows."
"Any company worth its salt would demand using an open source cryptography as opposed to a shrink-wrapped product which this is," Muffett said.
Open-source code is thought by its adherents to be more secure and a better product since it has been tweaked by many more programmers than a product put out by a single company.
The United States limits the exportation of "strong" cryptography, mainly to make it easier for its intelligence agencies to do its work. For the NSA, that means listening in via its Echelon project to the telephone, fax, cable and other electronic communications of other nations.
It is illegal for the agency to eavesdrop on American citizens, meaning that if the NSA key exists, international businesses are most at risk, Fernandes said.
Still, Muffett said the NSA would be unlikely to conduct massive snooping on businesses outside the United States via a key on Microsoft Windows products -- if it exists. That would take too much work.
Instead, the agency could use a key to obtain a targeted piece of evidence or to trade information with other security agencies outside the United States.
"It's a bit of a conundrum from a political strategy point of view,"