Chinese bloggers posting their thoughts via Microsoft's net service face restrictions on what they can write.
Weblog entries on some parts of Microsoft's MSN site in China using words such as "freedom", "democracy" and "demonstration" are being blocked.
Chinese bloggers already face strict controls and must register their online journal with Chinese authorities.
Microsoft said the company abided by the laws, regulations and norms of each country in which it operates.
The censorship is thought to have been introduced as a concession to the Chinese government.
Following Yahoo, here is a second American internet giant giving way to the Chinese authorities and agreeing to self-censorship
Reporters Without Borders statement
Also being restricted on the free parts of the site are journal entries that mention "human rights" and "Taiwan independence".
Those using these banned words or writing entries that are pornographic or contain sensitive information get a pop-up warning that reads: "This message contains a banned expression, please delete this expression."
Microsoft's MSN Spaces site is run by its joint venture partner, the state-backed Shanghai Alliance Investment Ltd.
Microsoft said people who used its MSN Spaces service were required to abide by its code of conduct.
The code says that users are not allowed to upload, post, or distribute any content which "violates any local and national laws that apply to your location".
"Microsoft is a multi-national business and as such needs to manage the reality of operating in countries around the world," a Microsoft spokesperson told the BBC News website.
Focus on bloggers
The restrictions operate on the free online Spaces area of the MSN China site where many people have created journals or weblogs.
Microsoft is being pragmatic in its approach. It is not up to it to make political statements
William Makower, Panlogic
China recently introduced stringent regulations that require all blog owners to register their web journal with the state by 30 June.
The regulations require the writer of a blog to identify themselves to the authorities.
According to Reporters Without Borders, China is using a system called Night Crawler to patrol web journals and make sure that only registered blogs are published. Unregistered blogs will be shut down.
"Following Yahoo, here is a second American internet giant giving way to the Chinese authorities and agreeing to self-censorship", said the group in a statement.
"The lack of ethics on the part of these companies is extremely worrying. Their management frequently justifies collaboration with Chinese censorship by saying that all they are doing is obeying local legislation."
"We believe that this argument does not hold water and that these multinationals must respect certain basic ethical principles, in whatever country they are operating."
Microsoft is not alone in co-operating with the Chinese authorities to police what people can do online.
Internet cafe in China
Internet cafes have to police what the Chinese do online
Both Yahoo and Google have been criticised for similar activities and restricting what people can search for and read online.
"If you want to deal with the Chinese, you have to deal with their rules," said William Makower, CEO of Panlogic a marketing consultancy with operations in China.
"It is all very well to have high-minded ideals about how you want the Chinese to behave, but opposing China is going to be counter-productive."
"Microsoft is being pragmatic in its approach," said Mr Makower. "It is not up to it to make political statements."