The deal plays to the strength and weaknesses of both companies, and could be model for the creation of other clicks-and-mortar retailers.
Amazon will take care of the online part of the business, creating the web site, warehousing products and deliver them to customers.
Toys R Us and its toysrus.com website had problems with delivery, especially in the run-up to Christmas '99. Thousands of US customers did not receive their orders in time, and the Federal Trade Commission fined the company $350,000.
The old-style bricks-and-mortar firm Toys R Us, meanwhile, will spot the trends in the toy market, buy the toys, set prices and manage the inventory.
Last Christmas, Amazon got its buying wrong and was left with a pile of unsold toys. Amazon had to book losses of $39m, on total sales of $95m.
Alliance of losers
The strategic alliance is to last for 10 years, more than a couple of lifetimes for web ventures.
And analysts say it is a declaration of surrender for both companies.
For Amazon it is an admission that it may know all about the web, but has difficulties grappling with the intricacies of trend-driven markets like toys.
Toys R Us, meanwhile, pumped millions of dollars into setting up its own online operation and distribution network for order fulfilment, but failed to tackle web competitors like eToys.
Together, they hope to finally make money in this tricky market. Amazon boss Jeff Bezos said the alliance "speeds profitability for both of us",
Toys on tab
The new combined and co-branded web sites for toys and baby products will be launched in the autumn, and can be accessed through the product category "tabs" on top of the Amazon web site.
The toysrus.com and babiesrus.com web addresses will redirect to the Amazon sites.
For Amazon, though, the deal with Toys R Us could result in a dramatic change of its business model.
Th Seattle-based online shopping pioneer is not simply a retailer anymore. Its web site is about to turn into a shopping mall.
In the Toys R Us deal, Amazon will receive regular fixed cash payments, an extra payment for every toy sold, and and a small percentage of total revenue.
Amazon will also receive warrants entitling it to buy 5% of the joint web venture.
The online firm, saddled with a multi-billion dollar debt, will be grateful for the regular cash flow.
Toys R Us, meanwhile, carries the inventory risk, but stands to receive the online profits - if it can make any.
Toys R Us chief executive John Eyler said sales had to increase 300% to 400% for the venture to become profitable.
Making money online - not
Selling toys online has turned out to be a tough proposition.
Despite backing from entertainment giant Walt Disney, online retailer toysmart.com was forced out of business in May this year.
Red Rocket, a toy store owned by Viacom, suffered the same fate.
And competitor KBKids.com recently had to sack 30% of its staff.
Now there are just two large online toy retailers left in the United States, as the Amazon/Toys R Us alliance tries to tackle the market leader eToys.