The move, which spells the end of Piczo's relationship with former third party sales partner, Ad2One, comes with many experts predicting a massive rise in marketing spend on the sector, which is one of the fastest growing on the web.
Piczo launched in the US in 2004 and only started virally marketing its service in the UK last year, but already claims to have nearly 7.5 million unique UK users, generating one billion page impressions a month, making it the company's most successful territory.
Chris Seth, UK managing director of Piczo and former media director at Proximity, who joined the social networking site in October, said so far it had mainly attracted advertising from the likes of film distributors, music labels and gaming companies.
But he said: "The deal with Microsoft is a major step forward for us.
"We are already the leading teen social networking site in the UK, but we see the potential for a much wider range of brands to start advertising with us."
Microsoft, which has its own social networking site, Spaces, and Piczo declined to comment on the details of the new contract.
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