The deal has been signed speedily, with Microsoft saying that talks only began last week. The first ads are likely to appear in the autumn.
signed a similar deal with earlier this month, worth $900m in ad revenue over three years. The tie-up between Microsoft and Facebook is seen as a way of Microsoft improving revenues for its online ad service AdCenter, in which it has invested heavily.
The deal initially lasts for three years, giving Microsoft sole rights to banner advertising and sponsored links on . The companies will also work together to develop new ad initiatives.
The news follows the revelation yesterday that , another hugely popular community website, had started selling advertising on its homepage. Its first client is Warner Bros, which is pushing the new Paris Hilton album 'Paris'.
Steve Berkowitz, senior vice-president of the online services group at Microsoft, said: "Our collaboration with Facebook is about joining our cutting-edge advertising technology and sales force with a true innovator in social networking.
"We believe that the combination of Microsoft and Facebook strengths will be incredibly attractive to advertisers as they forge more meaningful connections with one of the largest, most engaged audiences on the internet. The consumer assets brought to bear by this relationship will be very hard to match."
Facebook has 9m registered users, and grew out of a student website at Harvard University. Founded in February 2004 by Mark Zuckerberg, it connects people based on where they are or where they work or attend school.
The company is privately owned. It turned down an offer of $750m to sell it, believing that it could be worth as much as $2bn, according to Business Week, although in June Interpublic bought a 0.5% stake in the company.
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