Microsoft has confirmed a deal to buy internet phone service Skype for $8.5 billion, making it Microsoft’s largest acquisition. Skype, based in Luxembourg, has 663 million users.

Skype dropped a planned IPO last summer after it was sold to investors by eBay which had sold 70 per cent for $2 billion. eBay had paid $2.6 billion for the business in 2006.

Microsoft CEO Steve Ballmer said: “Skype is a phenomenal service that is loved by millions of people around the world.

“Together we will create the future of real-time communications so people can easily stay connected to family, friends, clients and colleagues anywhere in the world.”

Skype will now become a new division within Microsoft, and Skype chief executive Tony Bates will lead the business, reporting to Ballmer.

Some analysts have questioned whether it is paying too much for a company that has struggled to turn a profit. The company was effectively valued at $2.5 billion a year ago.

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