Microsoft is to buy Nokia's devices and services business, license Nokia's patents, and license and use Nokia's mapping services for £4.59bn.
As part of the deal Nokia president Stephen Elop will head up Nokia’s devices and services division.
The move, which has sent shock waves through the mobile industry today, signals Microsoft’s clear intention to ramp up its drive into the smartphone sphere with its Windows Phone operating system, delivering a major challenge to Apple and rival Android manufacturers.
Under the terms of the agreement, Microsoft will pay £3.2bn to purchase Nokia's devices and services business, and £1.39bn to license Nokia's patents.
The deal is expected to complete in the first quarter of next year. The transaction is expected to be completed early next year.
In a joint statement Microsoft said it ‘aims to accelerate the growth of its share and profit in mobile devices through faster innovation, increased synergies, and unified branding and marketing.’
Steve Ballmer, Microsoft CEO said the move was ‘a win-win for employees, shareholders and consumers of both companies.’
He added: ‘Bringing these great teams together will accelerate Microsoft's share and profits in phones, and strengthen the overall opportunities for both Microsoft and our partners across our entire family of devices and services.’
He added: 'In addition to their innovation and strength in phones at all price points, Nokia brings proven capability and talent in critical areas such as hardware design and engineering, supply chain and manufacturing management, and hardware sales, marketing and distribution."
Ballmer said the purchase is expected to bring ‘significant long-term revenue and profit opportunities for our shareholders.’
Elop said: ‘With this combination of talented people, we have the opportunity to accelerate the current momentum and cutting-edge innovation of both our smart devices and mobile phone products.’