Microsoft has over the past three years allowed the NSA to gain access to outlook emails, Skype video calls and SkyDrive data as part of a secret US government intelligence initiative called Prism, according to a report.
The Guardian claims to have acquired 'top-secret documents' which allegedly reveal the sharing of users' private information between a number of Silicon Valley firms, including Microsoft, and US intelligence agencies.
The report alleges that Microsoft helped the NSA to bypass its encryption measures to intercept web conversations and emails via Outlook.com, including Hotmail.
It also says that, through the government's secret Prism program, intelligence agencies were allowed access to Skype calls, including video and audio, and to data stored on Microsoft's SkyDrive cloud service. This information was apparently shared amongst the NSA, FBI and CIA, with one NSA document allegedly describing the initiative as a "team sport".
Skype 'integration' into Prism is said to have begun in November 2010, but surveillance didn't commence until February 2011. At first, claims the report, only audio was attainable, but the capability to access video was added in July 2012.
Microsoft has denied complying with "the kind of blanket orders discussed in the press over the past few weeks", and says it has "argued for additional transparency" with regards to the issue.
The firm said in a statement to the Guardian: "We have clear principles which guide the response across our entire company to government demands for customer information for both law enforcement and national security issues. First, we take our commitments to our customers and to compliance with applicable law very seriously, so we provide customer data only in response to legal processes.
"Second, our compliance team examines all demands very closely, and we reject them if we believe they aren't valid. Third, we only ever comply with orders about specific accounts or identifiers, and we would not respond to the kind of blanket orders discussed in the press over the past few weeks, as the volumes documented in our most recent disclosure clearly illustrate.
"Finally when we upgrade or update products legal obligations may in some circumstances require that we maintain the ability to provide information in response to a law enforcement or national security request. There are aspects of this debate that we wish we were able to discuss more freely. That's why we've argued for additional transparency that would help everyone understand and debate these important issues."
Shawn Turner, spokesman for the director of National Intelligence, and Judith Emmel, spokeswoman for the NSA, issued a joint statement in response to the report.
"The articles describe court-ordered surveillance - and a US company's efforts to comply with these legally mandated requirements," they said. "The US operates its programs under a strict oversight regime, with careful monitoring by the courts, Congress and the Director of National Intelligence. Not all countries have equivalent oversight requirements to protect civil liberties and privacy.
"In practice, US companies put energy, focus and commitment into consistently protecting the privacy of their customers around the world, while meeting their obligations under the laws of the US and other countries in which they operate."
Microsoft's $8.5 billion acquisition of Skype in 2011 was marked as the software giant's largest ever acquisition in its forty year history. The firm has since integrated Skype as the default chat service across a wide range of its flagship devices including Windows PCs, tablets, Xbox 360 and the upcoming Xbox One.
Microsoft's Xbox division has been recently forced to address privacy concerns regarding its always-on Xbox One Kinect sensor. The firm said that it 'prioritized your privacy' with in-depth user-defined options which will allow Xbox One owners to dictate how functional their Kinect sensor is.