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The anti-trust dispute between the software giant and its rival has been dragging on for 16 months and centred on Microsoft's internet browser Explorer.

Microsoft had consistently been accused of bullying PC manufacturers to bundle its Explorer browser technology with PCs instead of AOL's Netscape. The practice ensured that Netscape, which dominated the market in the early days of the net, was almost unknown to a new generation of web users.

The private AOL case against Microsoft followed a ruling by a federal court that accused the software firm of violating anti-trust laws to maintain its monopoly in personal computer operating systems business with its Windows system.

In the government case, Netscape was portrayed as the principal corporate victim. Microsoft, the court ruled, repeatedly bullied PC makers and others to favour its browser over Netscape, for which AOL paid $10bn (£6.05bn) in 1999.

The deal will see Microsoft give AOL a seven-year royalty-free licence to its internet browser software as well as faster and greater access to Microsoft's Windows operating system, which will make it work far easier with AOL's online service.

In return, AOL has agreed in return to use Microsoft's Explorer. The agreement effectively brings to end what became as the browser wars that pitted AOL's Netscape pioneer in a losing battle against the dominance of Microsoft's Explorer.

Bill Gates, the Microsoft chairman, said: "The agreement we've reached marks a new phase of relations between Microsoft and AOL Time Warner. It puts any past issues behind us."

The two have also signed a digital media agreement, which will see the two companies work together on a series of initiatives to support the rollout of digital media for consumers and support new business models for content owners through digital rights management technology as part of an effort to combat piracy.

"With Microsoft's media technology expertise and AOL Time Warner's content expertise, we believe we can accelerate the adoption of digital media for the internet and help content providers across the entire industry," Gates said.

The legal settlement resolves the private anti-trust lawsuit filed against Microsoft in January 2002 by AOL Time Warner's America Online unit on behalf of its Netscape subsidiary.

Dick Parsons, AOL Time Warner's chairman and CEO, said: "We welcome the opportunity to build a more productive relationship with Microsoft. Our agreement to work together on digital media initiatives marks an important step forward in better serving consumers and protecting the interests of all content businesses. We look forward to others in the media and entertainment industries joining together with us to help to advance the digital distribution of content to consumers while maintaining copyright protection."

As well as ending the browser wars, it also marks a new shift between technology and media companies. Prior to its merger with Time Warner, AOL had a much greater focus on technology through its Netscape business.

This included technology alliances with Sun Microsystems, the Sun Netscape Alliance. However, since its merger with Time Warner, the focus has been less on technology and more on media, content and delivery leaving the technology to companies like Microsoft.

The size of the $750m surprised many industry watchers, however. While it is large, it is just a drop in the ocean for Microsoft. AOLTW said it would use the cash to reduce debt.

The payment also marks a change of tactic from Microsoft, replacing its hostile attitude to rivals with a more conciliatory one. The early settlement may have also saved it billions in potential damages making $750m look a cheap price to pay for an outcome that still leaves it as the dominant player on the internet.

For AOL's part, it is thought that the settlement was speeded along by a change of leadership following the ousting of AOL executives such as chairman Steve Case, who went last month, from power within AOL Time Warner.

Jonathan Miller, America Online chairman and CEO, said: "These agreements are good news for the AOL service, its members and the internet as a whole. It provides America Online with certainty that, as Microsoft develops new operating systems and platforms, the AOL service will work optimally with them to the benefit of our members worldwide."

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