Microsoft has agreed to buy Nokia's mobile phone business for £ 5. 4bn euros ($7. 2bn; £4. 6bn).
Nokia will also license its patent and map services to Microsoft.
Nokia's shares rose 35% in the news, while Microsoft's shares fell more than 5%.
The acquisition will be completed in early 2014, when about 32,000 Nokia employees will be transferred to Microsoft.
Nokia is already behind rivals Samsung and Apple, while critics say Microsoft is slow to enter the mobile market.
Describing the deal as "a big step forward," Microsoft chief executive Steve Ballmer told the BBC, his company is transforming from a company known for its software and PCs to a company focused on equipment and services.
"We have done a lot of great work in the past two years --and-a-
We have been working with Nokia for half a year, from no phones to 7 phones.
It is reported that a total of 4 million Smart Windows phones came out last quarter . "
But he admitted: "We have more work to do to expand the scope of our products.
"Microsoft is one of the biggest companies in the technology industry, and Microsoft has struggled as consumers avoid traditional PCs and laptops and favor smartphones and tablets.
Critics say the company is too slow to respond to the booming mobile market.
The company launched its Surface tablet last year, but sales are relatively slow.
Analysts say the company wants to make sure its strategy in the mobile phone market is correct.
Manoj Menon, managing director of consulting firm Frost & Sullivan, told the BBC: "Mobile is an area with great potential, but it has always been one of Microsoft's weaknesses . ".
"Obviously, the first priority for the company is to develop a mobile strategy correctly.
The deal is a perfect step from a strategic point of view, and the only problem is that they can execute the plan well.
Ben Wood, an analyst at CCS Insight, a telecoms consultancy, said: "Microsoft's entry into the mobile market is a necessary gamble, but given Nokia's complete reliance on Nokia on Windows Phone devices, as well as Apple and Google's competitive position on rival mobile platforms, this is an understandable move.
"It completely reshaped Microsoft's business and pushed it firmly into the hardware space.
But it also raises big questions about the sustainability of other companies like HTC and BlackBerry, which remain pure
"Play with mobile phone manufacturers," he added . ".
Nokia used to be a leader in mobile phones, but its sales for the three months ended June fell 24% year-on-year. It sold 53.
Mobile phone sales in the quarter was 7 million, down 27% year on year.
However, sales of the new Lumia phone running Microsoft's operating system have increased during this period.
The deal between the two companies will help "bring hardware closer to the operating system and achieve closer integration," Mr. maynon said ".
"This will help Microsoft develop a more effective competitive strategy in the mobile space," he said . ".
Microsoft also agreed 10-
Reached an annual licensing agreement with Nokia to use the Nokia brand on current mobile phone products.
Nokia also announced an adjustment to its leadership team due to the sale.
Stephen Elop will step down as president and chief executive of Nokia and step down as its board of directors.
The company said he would become the executive vice president of equipment and services, adding that he is expected to "move to Microsoft" at the end of the transaction expectation ".
Elop's move to Microsoft comes as the company looks for a new CEO.
Steve Ballmer, Microsoft's current president, announced last week that he will retire and is expected to leave within the next 12 months.
He told the BBC: "I am satisfied with what we have achieved, and he summed up his leadership tenure at one of the world's largest technology companies;
I am satisfied with the level of innovation we bring to global smart devices.
"But there will always be another challenge, and with this acquisition we will take things to a new level.
"Elop, who left Microsoft to join Nokia in 2010, was considered by some to be one of the leaders who replaced Ballmer.
The deal remains to be approved by Nokia shareholders and regulators.
Nokia says it will focus on three key businesses once sales are completed --
Network equipment manufacturing, mapping and location services, and technology development and licensing.
Earlier this year, the company agreed to buy a 50% stake in the joint venture, Nokia Siemens Networks. NSN)
A company that manufactures telecom network equipment. 7bn euros.