Microsoft will bring its web search and search ads to the social networking site. Microsoft is already an investor in Facebook, having bought a 5% stake for $240m last year, and it has an existing deal to sell banner ads on the site.
Microsoft revealed its plans to expand relations with Facebook yesterday at its annual meeting for financial analysts in Redmond, Washington.
Mark Zuckerberg, founder of Facebook, said: "Search in Facebook definitely needs to get better."
The deal give Microsoft's search business a much-needed shot in the arm and allow it to tap into the search activity of Facebook's 90m members and allow the software giant to challenge search leader Google.
The deal with Facebook follows a deal it signed with PC maker HP in June to put Microsoft's service on its desktops.
For Facebook, it plugs a gap in the service and ensures that people can now search within the social media site without having to leave it to use Google or another search engine.
However, analysts have questioned whether Microsoft can successful monetise the deal. Google has been reported of complaining that its thre- year deal with MySpace makes it hard to do this when people are networking rather than clicking on ads.
At the same time, Steve Ballmer, Microsoft chief executive, revealed details about the company's online strategy following its failed efforts to buy Yahoo!.
His speech came after the news broke yesterday of the departure of Kevin Johnson, the executive who led Microsoft's $47.5bn failed bid to buy Yahoo!. Johnson, who was in charge of Microsoft's Windows and web operations, is leaving to become chief executive officer at Juniper Networks.
Ballmer said that Microsoft would continue to invest heavily in search and look for ways like the Facebook deal to boost its modest 3.5% share of the global search market. Google has around 60% and Yahoo! 14%. The numbers a little better in the US where Google has 61.5%, Yahoo! 20.9% and Microsoft 9.2%.
Ballmer said: "Search is one of the starting points on the internet. It's the best place to distribute new internet services to the consumer."
As part of the strategy, Microsoft said it planned to split its platform and services division into two groups, Windows Live and online services groups, that will report directly to Ballmer.
He said: "This new structure will give us more agility and focus in two very competitive arenas."