The acquisition of Overture by Microsoft rival Yahoo! for $1bn (£0.6bn) earlier this year had cast doubt on the relationship, with analysts and industry watchers predicting that Microsoft would tear up the deal because it didn't want to work with a competitor.
But in what is seen as an admission that it will not get involved in the lucrative paid-for market, Microsoft has extended the agreement to 2005 for the US and the UK.
Despite the agreement, Microsoft is understood to have allocated $5bn (£3bn) to the development of new search technology, having become concerned that it has fallen behind the competition.
Martin Child, Overture managing director for Northern Europe, said the renewed deal was proof of Overture's market-leader status in the sector.
It accounts for more than 40% of the total online advertising market and is said to be worth £100m.
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