Internet search engine Google has bought a 5 per cent stake in Time Warner's AOL for a $1bn investment.

The deal, which was approved by Time Warner's board last week, values AOL at $20bn.

In a joint statement, the companies said the agreement would create a global online advertising partnership that would make more of AOL's content available to Google users.

The strategic alliance expands on the original relationship between the two companies launched three years ago.

California-based Google will become the only shareholder in AOL, other than Time Warner. However, Time Warner will retain management control and full strategic flexibility over its subsidiary.

The agreement will be a big disappointment for software giant Microsoft which had hoped to strike a deal with AOL.

Google chief executive Eric Schmidt: "AOL is one of Google's longest-standing partners, and we are thrilled to strengthen and expand our relationship."

"AOL is one of Google's longest-standing partners, and we are thrilled to strengthen and expand our relationship," said Google chief executive Eric Schmidt.

"Today's agreement leverages technologies from both companies to connect Google users worldwide to a wealth of new content. We've also created a simple way for AOL Marketplace advertisers to buy and place search-related advertising across the AOL network."

Time Warner chief executive Dick Parsons added: "We're very pleased to build significantly on our special relationship with Google in a way that will meaningfully strengthen AOL's position in the fast-growing online advertising business and help drive more advertisers to its Web properties.

"A critical piece of this strategic alliance will be our content, which we will be making more accessible to Google users."

The tie-up between Google and AOL will see the two internet giants expanding their search and advertising alliance to include video and instant messaging.

Time Warner shares fell 21 cents to close at $17.74 on Tuesday, while Google shares rose $5.14 to $429.74.