Yahoo and Microsoft have announced a long-rumoured internet search deal that will help the two companies take on chief rival Google, BBC reported.
Microsoft's search engine will power the Yahoo website and Yahoo will in turn become the advertising sales team for Microsoft's online offering.
Yahoo has been struggling to make profits in recent years.
But last year it rebuffed several takeover bids from Microsoft in an attempt to go it alone.
Microsoft boss Steve Ballmer said the deal would provide Microsoft's search engine, Bing, with the necessary scale to compete.
"Through this agreement with Yahoo, we will create more innovation in search, better value for advertisers, and real consumer choice in a market currently dominated by a single company," said Mr Ballmer.
Yahoo said the deal would benefit Yahoo's users and advertisers.
"This agreement comes with boatloads of value for Yahoo, our users, and the industry. And I believe it establishes the foundation for a new era of internet innovation and development," said Yahoo chief executive Carol Bartz.
The deal became possible after Yahoo's co-founder Jerry Yang stepped down as chief executive of the company late last year.
"Only a Yahoo outsider like Ms Bartz could do such a deal," said Tim Weber, business editor of the BBC News website.
"She has no sentimental attachment to what was once the core of Yahoo, its search business. Microsoft was helped by the fact that at long last it managed to develop a search engine -Bing - that is a credible alternative to search giant Google."