BBC Internet correspondent Chris Nuttall: "A Goliath to challenge Microsoft"

Under the deal AOL - based in Virginia - is expected to operate Netscape as a separate division in Mountain View, California.

Netscape, which was founded four years ago and popularised Web browsing, will cease to be an independent business.

Netscape's Chief Executive Officer, James Barksdale, called the link-up an "exciting partnership" which would enable the company "to deliver even better and more complete products and services to both existing and new customers".

Mr Barksdale will join AOL's board of directors under the agreement.

Netscape shareholders will receive 0.45 shares of AOL stock for each of the 99.5 million outstanding shares of Netscape stock.

Microsoft hopes

When news of the negotiations became public, Microsoft immediately claimed that the deal showed that the Internet industry was very competitive, and called on the government to abandon its anti-trust suit against the company.

At the heart of that court case is the claim that Microsoft bundled its Internet browser, Internet Explorer in its own software, thus damaging the prospects of Netscape, who once held the dominant position in making the software used for exploring the web.

AOL is a leading Internet firm offering access to the worldwide network of information.

The complex deal includes another software giant Sun Microsystems.

As part of the agreement Sun Microsystems will distribute Netscape's business-level "server" software, and AOL will use Sun's Java programming technology, initially for a three-year period.

Blow to Microsoft

Despite hopes for a legal respite, the deal is a blow to Netscape's arch rival Microsoft.

Together AOL, Netscape and Sun Microsystems will be a significant threat to Bill Gates' computer software giant.

AOL currently distributes Microsoft software to its subscribers and a switch to Netscape will have significant repercussions for the development of the US Internet industry.

"This is bad news for Microsoft," said William Field, partner at the US consultancy Spectrum Strategy Consultants.

Microsoft is currently embroiled in a prolonged court battle with the US Government over allegations that it attempted to dominate the Internet.

Allegations that Microsoft's attempted to limit the use of Java, Sun's universal programming language for the Internet, have also been made.

Both AOL and Netscape are co-operating with the government at the Microsoft anti-trust trial.

AOL considered a deal with Netscape three years ago in a bid to counter the competitive threat from Microsoft.

Talking for weeks

The talks between AOL, Netscape and Sun Microsystems had been going on for weeks.

Shares in AOL and Netscape soared last week after reports that AOL could use Netscape's browser instead of Microsoft.

AOL has the right to terminate its co-operation with Microsoft at the end of December.

Any deal with AOL would provide an important boost to Netscape's business.