Microsoft Corp.on Thursday said it struck a deal to enable its Windows Mobile operating system to work with Qualcomm Inc.'s mobile phone chips, a move seen helping it gain more headway in the wireless business.

The move allows Qualcomm's customers to develop smart phones that run Microsoft's mobile operating system and offer computer-like functions such as e-mail, mobile TV, and word processing, the companies said.

One Qualcomm shareholder said the deal appeared to be particularly important for Microsoft, which is trying to extend its dominance of the desktop to the cellphone.

I think Qualcomm is in a much better position today to make deals than Microsoft, said Jim Hillary, owner of Denver hedge fund Independence Capital Partners, which has roughly $400 million under management. Microsoft needs access (in wireless) and Qualcomm provides access.

Qualcomm already dominates the market for CDMA chips, used in many U.S cellphones, and sells technology licenses and chips for W-CDMA, a mobile technology emerging in Europe.

Hillary noted that Qualcomm already has relationships with many of the cellphone providers and device makers around the world that Microsoft also needs to court.

The smart phone market is still a small part of the overall cellphone market and the devices tend to be more pricey than traditional cellphone.

But Microsoft's general manager of mobile and embedded devices, Scott Horn, said he expected dramatic growth ahead.

When we look at the smart phone market, particularly the market for mobile e-mail and using office application on mobile devices, we really think the market's only been scratched yet, he said.

You'll see more types of smart phones come to market more quickly, and we expect a broader range of smart phones.

The first devices based on the deal would likely come to market in 2007, Horn said.

Microsoft shares were up 1.3 percent at $23.48 in afternoon trade while Qualcomm shares were up 1.5 percent at $52.54.