Microsoft’s Bing 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 10-year deal would provide Microsoft’s Bing search engine 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.

“Microsoft and Yahoo know there’s so much more that search could be. This agreement gives us the scale and resources to create the future of search,” he added.

In return for ceding control of its search engine, Yahoo will get to keep 88% of the revenue from all search ad sales on its site for the first five years of the deal, and have the right to sell adverts on some Microsoft sites.

‘New era’

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 Ms Bartz.

“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.”

Technology analyst Rob Enderle said: “This move makes up for a lot of the stupid mistakes made by the preceding [Yahoo] administration”.

The tie-up will give Microsoft and Yahoo a combined market share in the US search ad market of about 30% with Google still the dominant force with a share of about 65%. In the UK, the Google share is even higher (around 85%).

The deal ends years of back-and-forth negotiations between the two companies.