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

AOL is the world's largest internet service provider, giving customers access to the worldwide computer network.

The deal allows AOL to distribute Netscape's Internet browser software.

AOL will now own two of the most heavily used sites on the Internet. It will also be one of the most important companies in the computer software industry and the main rival to Microsoft's market dominance.

Netscape, which was founded four years ago popularised Web browsing and the Internet by offering easy-to-use software.

But the Internet pioneer lost out in a bruising battle with Microsoft and its shares have halved since peaking in 1996 amid concerns about its future.

Under the deal AOL, based in Virginia, is expected to operate Netscape as a separate division in Mountain View, California. No job losses are planned.

Netscape CEO James Barksdale: "Exciting partnership"

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.

Competition claims

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.

The complex deal includes another software giant Sun Microsystems.

The companies will work together to distribute Netscape's products and develop Sun's Java programming language.

Java is intended to work on any computer software and is used widely on websites.

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 Microsoft.

AOL currently distributes Microsoft software to its 14m subscribers and a tie up Netscape will have significant repercussions for the development of the Internet industry.

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 will retain Microsoft's Internet Explorer Web browser software on its service.

However users will now have the option of installing Navigator, Netscape's browser, if they choose.

News of the deal comes after intense media speculation and prolonged discussions between the three companies.

Netscape shareholders will receive 0.45 shares in AOL for each of the 99.5m outstanding shares in Netscape.