"Although we are disappointed by this award, we will engage with our partners and DOI to review and understand the reasons for this decision," the company said in a statement.

Microsoft and Google are engaged in an all-out war in the market for online productivity applications. They are chasing customers of all sizes while sniping at each other and touting their customer wins, especially when tens of thousands of users are involved.

The stakes are particularly high for Microsoft, whose email and collaboration software, like Office, Exchange and SharePoint, represents a big part of its revenue. The situation is different for Google, whose main revenue source is online advertising. Google has been building up its enterprise software unit as a complementary business for years. In the past 18 months or so, it has managed to broaden Google Apps' appeal beyond small companies, attracting some large government, education and private-sector clients.

The Interior Department's contract was actually awarded to Google partner Onix Networking, which will have 60 days to prove it can meet the agency's various technology and security requirements. It then expects to roll out the apps across the agency by December.

Google didn't immediately make its own announcement about the customer win, nor did it immediately respond to a request for comment.