Technology giant Microsoft is to buy Nokia's mobile phone arm in a "bold step" in the smartphone market that will cost it about £4.6 billion
The world's biggest software company will buy the Nokia unit that makes mobile phones, including its line of Lumia smartphones that run Windows Phone software, as well as a 10-year licensing agreement to use Nokia's patents.
The deal is expected to close in early 2014 and see 32,000 Nokia employees transfer to Microsoft.
Outgoing Microsoft boss Steve Ballmer, who announced plans to retire last month, said: "It's a bold step into the future - a win-win for employees, shareholders and consumers of both companies."
It is the latest mega deal in the telecoms sector after UK-based Vodafone last night confirmed the sale of its 45% stake in US group Verizon Wireless for 130 billion US dollars (£84 billion) - netting its investors a £54 billion cash and shares windfall.
Finnish firm Nokia, which was once the world's biggest mobile phone maker, will now become a telecoms equipment maker, representing a dra matic change in its near 150-year history.
For Microsoft, it marks an ambitious attempt to expand its share of the mobile devices market, having been slow to respond to demand and being overtaken by the likes of Samsung and Apple.
The group launched its Surface tablet last year, but take up has been muted, and it unveiled an overhaul in July to transform itself into a devices and services group.
Mr Ballmer said: " 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."
Nokia and Microsoft first teamed up in February 2011 on the Lumia smartphones.
Stephen Elop, Nokia president and chief executive, will step down to become head of the Nokia devices and services business within Microsoft, returning to his former company.
He has been tipped as one of the front-runners to take over from Mr Ballmer, who plans to retire within a year.
Mr Elop said the deal provides the " opportunity to accelerate the current momentum and cutting-edge innovation of both our smart devices and mobile phone products".
It is understood that Microsoft and Nokia have been in negotiations since the end of January.
Nokia investors welcomed the deal, sending shares in the company up more than 40% in Helsinki.
But Microsoft shares fell 4% in early trading on Wall Street.
The deal with Nokia represents the second biggest acquisition in Microsoft's 38-year history, ranking behind an 8.5 billion dollar (£5.5 billion) purchase of internet calling and video conferencing service Skype.
Ajay Bhalla, professor of global innovation at Cass Business School, said the Nokia phone business acquisition was a "great bargain".
"Not only will Microsoft get access to Nokia's impressive intellectual assets for small change, it will also get access to Nokia's well-established infrastructure and competencies in emerging markets - where it continues to retain an impressive market share," he added.
The money to buy Nokia's smartphones and patents will be drawn from the nearly 70 billion dollars (£45 billion) that Microsoft held in overseas accounts as of June 30.
Jonathan Jackson, head of equities at Killik & Co, said it was the "correct strategic choice" to bring handsets in-house, significantly boosting the margins Microsoft can earn on each phone.
He said: "This deal represents recognition by Microsoft that success in phones is vital to success in tablets and PCs, and to achieve success in phones requires more control over device innovation and the app ecosystem."