Microsoft Corp Tuesday said it has agreed to buy the popular Internet telephone service Skype Technologies SA for US$8.5 billion in the biggest deal in the software maker's 36-year history.

Buying Skype would give Microsoft a potentially valuable communications tool as it tries to become a bigger force on the Internet and in the increasingly important smartphone market.

Microsoft said it will marry Skype's functions to its Xbox game console, Outlook e-mail program and Windows smartphones. The company said it will continue to support Skype on other software platforms.

The sellers include eBay Inc and private equity firms Silver Lake and Andreessen Horowitz.

About 170 million people log in to Skype's services monthly, though not all of them make calls. Skype users made 207 billion minutes of voice and video calls last year.

Most people use Skype's free calling services, which has made it difficult for the service to make money since entrepreneurs Niklas Zennstrom and Janus Friis started the company in 2003. An average of about 8.8 million customers per month, or just over 1 percent of the user base, pay to use Skype services.

Skype lost US$7 million on revenue of US$860 million last year, according to papers that the company has filed since announcing its intentions last summer to launch an initial public offering of stock. The IPO was later put on hold. Skype's long-term debt, net of cash, was US$543,883 at the end of 2010.

The Skype takeover tops Microsoft's biggest previous acquisition - a US$6 billion purchase of online ad service aQuantive in 2007.

Microsoft said Skype will become a new business division headed by Skype CEO Tony Bates, who will report directly to Ballmer.

Although it makes billions from its computer software, Microsoft has been accustomed to losing money on the Internet in a mostly futile attempt to catch up to Google Inc in the lucrative online search market. Microsoft got so desperate that it made a US$47.5 billion bid to buy Yahoo Inc three years ago, but withdrew the offer after Yahoo balked. Yahoo is now worth about half of what Microsoft offered.

Microsoft would be Skype's second large-company owner after eBay which bought Skype for US$2.6 billion in 2005.

But eBay's attempt to unite the phone service with its online shopping bazaar didn't work out.