The consumer watchdog is suing Microsoft for allegedly misleading 2.7 million Australians. Photo: Jennifer Dudley Nicholson/AAP PHOTOS

Software giant Microsoft is facing hefty penalties for allegedly misleading millions of Australian users over artificial intelligence-linked subscription price hikes.

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The nation's consumer watchdog has taken the US company to court for allegedly misleading customers into believing they must either pay extra fees when its AI assistant Copilot is integrated into their package or cancel altogether.

But subscribers also had the option to maintain their

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