Microsoft is feeling the squeeze as iPads and Android tablets continue to strangle the PC market, but that doesn’t mean it’s about to give up the fight. Not only is it set to raise the stakes with the upcoming release of Windows Blue, but it’s also planning to take the battle to its rival’s own turf with the release of a 7-inch version of its Surface tablet.

The Wall Street Journal reports that the consumer-friendly 7-inch Surface will go into production later this year, as part of a new lineup of tablet devices being planned by Microsoft. Its sources, who claim to be familiar with the matter, say that Microsoft is moving into the 7-inch tablet arena to counter a similar move by Apple, which released its 7.9-inch iPad Mini at the tail end of 2012. The paper didn’t specify what operating system the 7-inch Surface would run, but the likelihood is that these would be Windows RT machines.

Microsoft’s latest move comes on top of its plans to slash the cost of its Windows and Office software to try and boost sales of the next-generation of lower-priced ultrabooks running the Intel Bay Trail chip, due out later this year.  In addition, the Wall Street Journal’s sources say that a Microsoft smartphone is still under development, although the firm hasn’t decided whether or not to bring this device to the market.

Microsoft’s Slippery Surface

The Surface tablet was launched to much fanfare back in October last year, causing frustration among several partners that always saw Microsoft as a software supplier, rather than a direct competitor in the computing devices market. First to hit the shelves was the 10.6-inch RT version of Surface, followed by the Surface Pro running full Windows 8 earlier this year, but so far sales figures have been pretty bleak. Having shipped just under 900,000 units so far, according to research firm IDC, Microsoft hasn’t even come close to cracking the top five tablet vendors.

Microsoft’s latest move into the 7-inch tablet arena may have been prompted by a February report from DisplaySearch analyst David Hsieh, who noted an accelerating trend in the industry towards smaller display sizes in tablets. According to Hsieh, the biggest drivers of this trend are lower costs and the ability to hold such devices in one hand, affording greater convenience.

As we saw this morning, Microsoft’s PC business is rapidly being overwhelmed by the shift towards tablet devices and smartphones. IDC reported a record-breaking slump in PC sales this morning, with first quarter shipments down by 13.9% to just 76.3 million units. This decline was almost twice as bad as what analysts had first forecast, with much of the blame being pinned on the negative reception of Windows 8.