NEW YORK (Reuters) - Microsoft Corp shares fell two percent yesterday after Goldman Sachs cut its rating on the world's largest software company to "neutral," citing worries about a slow recovery in personal computer sales and a threat from tablet computers not using Windows software.

The downgrade from a major Wall Street firm is a blow to Microsoft, which generally has the support of sell-side analysts, despite a stock price stuck at the same level as eight years ago. Out of 39 analysts tracked by StarMine, 30 rate the stock a 'buy' or 'strong buy' and only one rates it a 'sell'.

Goldman analyst Sarah Friar said in her research note the revival in the PC refresh cycle, which many had hoped would swing higher this year and bolster demand for Microsoft's products, now appeared "more elongated".

She also said Microsoft's problems were "not just a this-year issue", saying revenue and investor sentiment would remain under pressure until the world's largest software maker gains a firmer foothold in smartphones and tablet computers.

Microsoft is expected to launch its Windows Phone 7 software on October 11, but investors are sceptical that it can claw back lost market share. Goldman said it did not see momentum this year, with Apple Inc's iPad and iPhone, and Google Inc's Android phone software already well established.

The world's biggest software company, which still powers more than 90 percent of the world's computers, risks losing its dominance if more people move to non-Windows tablets and smartphones.

Microsoft chief executive Steve Ballmer said in July that Windows-based tablets would be on the market as soon as they are ready, but the industry does not expect any real contenders to Apple's iPad until Intel Corp introduces its new, low-power chip early next year.

The brokerage cut its price target on Microsoft shares to $28 from $32.

Shares of Redmond, Washington-based Microsoft fell 55 cents to $23.83, extending a 23 percent decline from their 2010 high of $31.58 in April. In comparison, rival Apple's stock had risen six percent in the same period.

Goldman also said the company should raise its dividend beyond the recent 23 percent increase.

"We believe this would open the door to a larger investor base and keep the company more diligent from a spending perspective," it said, adding the company should also divest non-core businesses like gaming.