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What you asked is Windows Installer. The installation packages can be created using Visual Studio .NET. Visual Studio 6 has an add-on -- Visual Studio Installer 1.1, which only supports early version of Windows Installer. Generated package files have extension MSI for setup modules or MSM for merge modules. Bootstrap setup.exe file is also provided.

Microsoft Platform SDK has some command line installer utilities (file names starting with msi). Also Orca is a tool for viewing and modifying installation packages.

All above is free if you have a license of Visual Studio.

WISE solutions are two popular commercial software for generating installation packages. They can generate packages in their own legacy formats or in MSI format.

Nullsoft Scriptable Install System is open source installer. It's quite easy to use and powerful if you don't want to install MSI packages or Microsoft components as dependent files. It does not use Windows Installer technology.