Yahoo Japan, Japan's largest Internet portal operator, will adopt Google's search engine, refusing to follow Yahoo Inc in choosing Microsoft as a partner.
Yahoo Japan, which currently uses Yahoo Inc's search technology, and Google together would control almost all of the search market in the word's second-biggest economy.
The deal stands in stark contrast to the decision by Yahoo Inc, which owns roughly one-third of Yahoo Japan, to integrate its search technology with Microsoft after the U.S. government blocked a tie-up with Google.
Yahoo Japan, which hopes the deal will strengthen its No. 1 position in the domestic market, will also adopt Google's search-linked advertisement delivery system and feed its data to Google sites.
The deal was seen by some as underscoring Microsoft's weaker position in search. Microsoft said the deal would hand the whole search market to Google and stifle competition.
If this Yahoo Japan and Google partnership works well, other search engine and portal site players all over the world may start adopting Google's technology, said Mitsushige Akino, chief fund manger at Ichiyoshi Investment Management.
At a news conference, Yahoo Japan President Masahiro Inoue said the Japanese company concluded after a thorough investigation that Microsoft's search technology was not strong enough for its needs, citing Japanese language search capabilities as one example.
Yahoo Japan shares gained 1.2 percent on reports of an imminent deal, while the broader market was flat. The announcement came after the close of trading hours.
Yahoo Japan said in a statement Yahoo Inc will remain a strategic partner for the Japanese portal site and the U.S. company will maintain its stake. Yahoo Japan will still use the Yahoo brand.
The Japanese company also said it has confirmed with the Japanese government that the partnership with Google will not violate antitrust regulations.
Yahoo Inc, Yahoo Japan's second-biggest shareholder after Softbank Corp, signed a 10-year deal with Microsoft last year to save hundreds of millions of dollars a year in expenses by shifting Web indexing chores to Microsoft while Yahoo focuses on improving searching.
Yahoo Inc executives have said the company expects to complete the search technology integration in all 59 countries in which it operates by the second quarter of 2012.
Microsoft railed against the Yahoo-Google tie-up in Japan on Tuesday, but stopped short of saying it would challenge it legally.
This agreement is even more anti-competitive than Google's deal with Yahoo in the United States and Canada that the Department of Justice found to be illegal, said Microsoft's general counsel in a statement.
(That) deal would have locked up 90 percent of paid search advertising. This deal gives Google virtually 100 percent of all searches in Japan, both paid and unpaid. It means there will be no search competition in Japan and that Google will end up controlling all personal search information for all Japanese consumers and businesses.
(Additional reporting by Benjamin Shatil, Yumiko Nishitani and Bill Rigby; Editing by Edwina Gibbs and Steve Orlofsky)