Microsoft is warning that attackers are exploiting a critical unpatched Windows vulnerability using infected USB flash drives.

The bug admission is the first that affects Windows XP Service Pack 2 (SP2) since Microsoft retired the edition from support , researchers said. When Microsoft does fix the flaw, it will not be providing a patch for machines still running XP SP2.

In a security advisory, Microsoft confirmed what other researchers had been saying for almost a month: Hackers have been exploiting a bug in Windows “shortcut” files, the placeholders typically dropped on the desktop or into the Start menu to represent links to actual files or programs.(See also “The Ultimate Guide to Windows 7 Security.”)

“In the wild, this vulnerability has been found operating in conjunction with the Stuxnet malware,” Dave Forstrom, a director in Microsoft’s Trustworthy Computing group, said in a post Friday to a company blog . Stuxnet is a clan of malware that includes a Trojan horse that downloads further attack code, including a rootkit that hides evidence of the attack.

Forstrom characterized the threat as “limited, targeted attacks,” but the Microsoft group responsible for crafting antivirus signatures said it had tracked 6,000 attempts to infect Windows PCs as of July 15.

On Friday, Siemens alerted customers of its Simatic WinCC management software that attacks using the Windows vulnerability were targeting computers used to manage large-scale industrial control systems used by major manufacturing and utility companies.

The vulnerability was first mentioned on June 17 in an alert issued by VirusBlokAda , a little-known security firm based in Belarus. Other security organizations, including U.K.-based Sophos and SANS Institute’s Internet Storm Center , picked up on the threat Friday. Security blogger Brian Krebs , formerly with the Washington Post, reported on it Thursday.

According to Microsoft, Windows fails to correctly parse shortcut files, identified by the “.lnk” extension. The flaw has been exploited most frequently using USB flash drives. By crafting a malicious .lnk file, hackers can hijack a Windows PC with little user interaction: All that’s necessary is that the user views the contents of the USB drive with a file manager like Windows Explorer.

Chester Wisniewski, a senior security advisory with Sophos, called the threat “nasty,” and said his tests showed that the exploit works even when AutoRun and AutoPlay — two functions that have previously been used by attackers to commandeer PCs using infected flash drives — are disabled. The rootkit also bypasses all security mechanisms in Windows, including the User Account Control (UAC) prompts in Vista and Windows 7 , said Wisniewski in a blog entry Friday.

Attacks can also be launched without using USB drives, Microsoft and Wisniewski both noted. “Affected shortcuts can also be distributed over network shares or remote WebDAV shares,” said Microsoft’s advisory.

“[That makes] a very bad situation worse,” said Wisniewski.

Microsoft did not set a timeline for patching the zero-day vulnerability; its next Patch Tuesday is not until Aug. 10.

For now, Microsoft said users could block attacks by disabling the displaying of shortcuts, and turning off the WebClient service. Both moves require editing the Windows registry, a chore most people avoid for fear of crippling their computers. Disabling shortcut files also will make it more difficult for users to launch programs or open documents.

That advice is all the help that those still running Windows XP SP2, the service pack that was retired from all support last Tuesday, will get from Microsoft.

“Noticeably absent from [Microsoft's list of affected software] are Windows 2000 and Windows XP SP2 as they are no longer supported,” said Wisniewski. “They are, however, definitely still vulnerable.” Microsoft also retired all editions of Windows 2000 from support last week.

Wolfgang Kandek, the chief technology officer of Qualys, echoed Wisniewski’s concerns about XP SP2 and Windows 2000 going patchless. “We assume the attack works against both of them and attackers will surely take advantage of this security hole ,” Kandek said Saturday.

Microsoft said that all still-supported versions of Windows, including Windows XP SP3, Vista, Server 2003, Windows 7, Server 2008 and Server 2008 R2, contain the bug. The betas of Windows 7 SP1 and Server 2008 R2 SP1, which the company released last week, are also at risk.

Windows XP SP2 users must upgrade to XP SP3 to receive a patch for the shortcut flaw when it eventually ships.

Users are being warned the Conficker worm is ready for action on 1 April 2009- although no one is certain what the worm will do.

Conficker is a computer worm that can infect PCs and spread itself across a network automatically, without human interaction.

Chris Thomas, principal consultant for CA’s Internet Security Business Unit told CRN, 1 April is when machines infected with the Conficker.C malware will “wake up” and start communicating with each other, waiting for commands.

“The sheer scale of infections is bigger than anything that CA has seen to date,” he said.

“Upon activation this multi-million node botnet could be used for anything from sending enormous amounts of SPAM messages and phishing attempts to a large platform from which to launch denial-of-service attacks, disrupting the internet as a whole.”

Thomas said as a matter of course, CA is urging PC users to make sure their anti-malware software is up to date with the latest signature.

In February, Microsoft partnered with technology industry leaders and academia to implement a coordinated, global response to the Conficker (aka Downadup) worm.

Microsoft also announced a US$250,000 reward for information that results in the arrest and conviction of those responsible for illegally launching the Conficker malicious code on the Internet.

Along with Microsoft, organisations involved in this collaborative effort include ICANN, NeuStar, VeriSign, CNNIC, Afilias, Public Internet Registry, Global Domains International Inc, M1D Global, AOL, Symantec, F-Secure, ISC, researchers from Georgia Tech, the Shadowserver Foundation, Arbor Networks and Support Intelligence.