The acquisition of Skype, which had reportedly also attracted interest from Cisco, Facebook and Google, is the largest ever by the US software giant.

"Skype is a phenomenal service that is loved by millions of people around the world," Microsoft chief executive Steve Ballmer said in a statement early Tuesday announcing the purchase.

"Together we will create the future of real-time communications so people can easily stay connected to family, friends, clients and colleagues anywhere in the world."

Microsoft said Skype will become a new business division within Microsoft with Skype CEO Tony Bates assuming the title of president of the Microsoft Skype Division, reporting directly to Ballmer.

Tens of millions of people use Skype to make low-cost or free phone calls over the Internet using their computers or smartphones. Skype bypasses the standard telephone network by channeling voice and video calls over the Web.

Buying Skype could be a way for Microsoft to shed some of its business software image and gain momentum in a hot smartphone market at a time when Internet lifestyles are going mobile.

Microsoft's Windows is the dominant computer operating system but its Bing search engine lags far behind Google and its Windows Phone mobile platform has been losing market share to Apple's iPhone, Google's Android and Research In Motion's Blackberry.

The companies said Skype will support Microsoft products like the Xbox game console and Kinect motion controller, Windows Phone and a wide array of Windows devices. Microsoft will also support Skype clients on non-Microsoft platforms.

"Mobile is clearly moving to be a rich communications capability above and beyond just voice," Bates said at a joint press conference with Ballmer in San Francisco. "We also focus very, very heavily on video. Video is in our DNA."

"At Microsoft we see tremendous opportunity to bring together what people want all on a single screen," Ballmer said. "We are committed to optimize Skype for TV with Xbox and Kinect, for the phone and for the PC."

Microsoft's biggest acquisition until now had been its 2007 buy of digital marketing firm aQuantive for $6.3 billion. Microsoft unsuccessfully tried to buy Yahoo! in 2008 for $47.5 billion.

Microsoft and Skype said the deal has been approved by the boards of both the Redmond, Washington-based Microsoft and the Luxembourg-based Skype, which is owned by investor group Silver Lake.

Magnus Rehle, managing director of Greenwich Consulting, said Microsoft is "buying a brand and a big chunk of customers."

"It could (also) be a defensive strategy from them... to block Facebook and Google from doing it instead," Rehle added.

Analyst Douglas McIntyre of 247WallSt.com said Microsoft's "real motive for a Skype buyout is likely to be to increase its mobile search engine share, something it has been unable to do so far.

"Skype may be a cheap ticket to the next huge search market," he said.

Gartner research vice president Leif-Olof Wallin said Microsoft had been forced to pay a high price for Skype but the deal has potential.

"The acquisition price sort of indicates that there has been some kind of bidding process that drove up the price," Wallin said.

"We see a lot of fit between the Microsoft strategy to increase consumer focus and Skype," Wallin added. "If this is integrated in the right way, it has a lot of potential to leverage platforms like Xbox and Windows Phone to new heights."

Skype was founded in 2003 and acquired by online auction giant eBay in September 2005. It was sold to the investment group led by Silver Lake in November 2009 in a deal that valued the company at $2.75 billion.

Skype has 170 million users and logged more than 207 billion minutes of voice and video conversations in 2010.

Skype last year announced plans for an initial public offering of stock and appeared on its way to profitability, but investors are evidently eager for a payoff.

Other members of the investor group led by Silver Lake include eBay, CPP Investment Board, Joltid Limited, Europlay Capital Advisors and Andreessen Horowitz.

The acquisition is subject to regulatory approvals which the companies said they expect to obtain this year.

Microsoft shares were down 0.97 percent at $25.58 in afternoon trading on Wall Street.

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