AOL, the Internet arm of media-entertainment giant Time Warner, said late on Tuesday that it was selling a 5-percent stake to the Internet search titan for $1 billion.
Microsoft spent months in pursuit of a tie-up with AOL, which at various times was also said to have been courted by Yahoo and eBay.
AOL is already Google's biggest advertising partner, and the Internet's leading search engine was keen to protect that revenue stream while rebuffing Microsoft's own ambitions in the booming search market.
RBC Capital Markets analyst Jordan Rohan said that for investors, who have made Google stock among the most coveted on the market, the tie-up will lift sentiment still further.
"Google shares do not have to suffer every time Microsoft boasts about its increasing prominence in search," he said.
"Instead, Microsoft appears to be a slightly smaller image in Google's rear-view mirror today than it was yesterday."
Google shares were up for most of the day before dipping at the end to close $3.41 lower at $426.33. The company made its market debut in August 2004 at $85 a share, and their value has more than doubled this year.
Shares in Time Warner slipped $0.16 to close at $17.58.
Time Warner chief executive Dick Parsons, shrugging off the threat of a shareholder revolt led by billionaire investor Carl Icahn over his plans for AOL, said that the alliance was the right choice for his troubled media group.
The deal, he said, would "meaningfully strengthen AOL's position in the fast-growing online advertising business and help drive more advertisers to its Web properties".
AOL, whose 2000 merger with Time Warner has gone emphatically sour, has been struggling as consumers shun its dial-up access and shift to high-speed Internet providers.
It is maneuvering instead to become the leading portal for a range of Internet services, including instant messaging (IM), classified ads, paid searches and multimedia entertainment.
AOL and Google will expand display advertising throughout the Google network, make AOL content more accessible to Google users, collaborate in a video search engine and make the Google and AOL IM services compatible.
Parsons said that it was also possible that Google users would, in time, gain online access to Time Warner's extensive film library.
AOL generated about 12 percent of Google's $3.2 billion in revenues in 2004, according to regulatory filings. AOL accounted for 11 percent of Google's revenue for the first six months of 2005.
Google was "protecting its Achilles' heel while Microsoft was poking at it" by chipping away at its archrival's revenue stream, said Rob Helm of the research firm Directions on Microsoft.
"Microsoft is concerned with denying Google resources that it would need to compete in areas Microsoft is really worried about," Helm said, warning that Microsoft could well hit back.
A brawl between Google and Microsoft is likely late in 2006, when the software titan is due to unleash its next-generation Windows Vista operating system with a built-in search engine.
But in turn, there is industry speculation that Google intends to launch its own productivity suite to strike at Microsoft Office software.
Doug Mitchelson at Deutsche Bank Securities said that for Time Warner, AOL's new ability to sell search functions on its sites is "critical" to its ability to compete with Yahoo and Microsoft's MSN for advertising dollars.
© 2005 Agence France-Presse
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