The move makes the company the latest foreign firm to face Beijing's scrutiny, in fields ranging from computing to baby milk.
"According to legal regulations, the SAIC (State Administration for Industry and Commerce) has set up a case to investigate Microsoft for alleged monopoly actions," the agency said in statement on its website.
The probe centres on its Windows operating system -- which is used on the vast majority of computers in China -- and the Office suite of programs, the statement said.
An earlier inspection last year considered allegations by companies that Microsoft bundled its products for sale and failed to disclose information about the software, causing problems with compatibility, it added.
The SAIC could not "eliminate the suspicion that Microsoft's... actions are anti-competitive", the statement added.
In May this year, China banned the use of Microsoft's Windows 8 operating system on all new government computers, amid reports alleging security concerns. That followed the United States indicting five members of a Chinese military unit for allegedly hacking US companies for trade secrets.
The announcement came after Microsoft said Monday that it was under investigation in China, without disclosing details, following state media reports that authorities had visited four of its offices.
The SAIC said it was questioning senior management staff of Microsoft China, including a vice president, as well as marketing and finance employees, but did not name them.
Microsoft did not immediately respond to a request for comment.
In an earlier statement on Monday, the company said: "We aim to build products that deliver the features, security and reliability customers expect, and we will address any concerns the government may have."
'De facto monopoly'
The probe comes amid what appears to be greater scrutiny of foreign firms doing business in the huge Chinese market.
Last week, state media said China was preparing to announce US chip maker Qualcomm has monopoly status in the mobile phone chip market. The government agency reportedly behind the move declined to comment.
China's commercial hub Shanghai last week launched a police investigation of a unit of US food supplier OSI Group after a media report saying its Shanghai factory, which supplied fast food giants such as McDonald's and KFC, used expired meat.
SAIC officials visited Microsoft offices in Beijing, Shanghai, southern metropolis Guangzhou and southwest Chengdu city on Monday, during which officials seized computers and digital files, and copied contracts and financial statements, the agency's statement confirmed.
The investigation was continuing, it said, adding some Microsoft employees were unavailable which had hampered the probe.
Earlier Tuesday, state media blasted Microsoft for its share of the operating system market in China.
"Microsoft's operating system software occupies a 95 percent share of the market in China, forming a de facto monopoly," the National Business Daily said.
Under China's anti-monopoly law, which went into effect in 2008, violators can be fined 1 to 10% of their previous year's sales revenue.
"It (Microsoft) has a dominant market position in terms of operating systems, which might be bundled together with other products, for example its Office series, for sale," You Yunting, a lawyer and partner of Shanghai DeBund Law Offices, told AFP.
Microsoft has previously faced anti-trust investigations in other markets for tying the company's Windows system to its products.
The European Commission fined the US company US$731 million (23.3 billion baht) in March last year for failing to offer users browser choices beyond its own Internet Explorer.
Since last year, China has launched sweeping probes into alleged wrongdoings by foreign companies in several sectors, including the pharmaceutical and baby milk powder industries.
Chinese authorities carried out an investigation of British drugmaker GlaxoSmithKline following allegations it systematically offered bribes to doctors and hospitals and passed the cost on to consumers through high prices.
Following a 10-month probe, police said in May that GSK's former head of China operations and two other executives authorised the bribery.
Last August, China fined six baby formula producers -- all but one of them foreign -- a total of $108 million for price-fixing.