MICROSOFT HAS CONFIRMED that it is to buy the popular Internet telephone service Skype – in the largest acquisition in the company’s history.

The Redmond-based software giant this afternoon confirmed the deal, first reported by the Wall Street Journal this morning, valued at $8.5 billion (€5.9bn), including assumed debt.

At this price, the Skype takeover tops Microsoft’s biggest previous acquisition — a $6 billion (€4.18bn) purchase of the online ad service aQuantive in 2007.

Buying Skype gives Microsoft a valuable communications tool as it tries to make a bigger splash on the Internet and become a bigger force in the increasingly important smartphone market.

Skype boasts about 663 million users worldwide who make voice and video calls over the Internet. The amount of calling on Skype’s network totaled 207 billion minutes last year, according to regulatory documents.

Most people use Skype’s free calling services, a penchant that has made it difficult for the service to make money since entrepreneurs Niklas Zennstrom and Janus Friis started the Luxembourg company in 2003.

Skype lost $7 million on revenue of $860 million (€560m) last year, according to papers that the company has filed since announcing its intentions last summer to launch an initial public offering of stock. The IPO, however, has been in a holding pattern. An average of about 8.8 million customers per month pay to use Skype services.

Although it makes billions from its computer software, Microsoft has been accustomed to losing money on the Internet in a mostly futile attempt to catch up to Google in the lucrative online search market.

Ubdeedm Microsoft got so desperate that it made a $47.5 billion (€33bn) bid to buy Yahoo Inc three years ago, but withdrew the offer after Yahoo balked. Yahoo is now worth about half of what Microsoft offered.

Since hiring former Cisco Systems executive Tony Bates as its CEO last year, Skype has explored joint ventures or an outright sale with Google and Facebook, according to unverified reports in newspapers and blogs.

Skype’s sale marks its second go-around under the ownership of a large company. EBay bought Skype for $2.6 billion (€1.8bn) in 2005, but its attempt to unite the phone service with its online shopping bazaar never worked out.

EBay would up selling a 70 percent stake in Skype to a group of investors led by private equity firms Silver Lake and Andreessen Horowitz for $2 billion (€0.7bn) 18 months ago.

Besides eBay, Silver Lake and Andreessen Horowitz, Skype’s other major shareholders are Joltid and Canada Pension Plan Investment Board.

- AP; additional reporting by Gavan Reilly

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