The deal comes as they take on entrenched messaging leader AOL and market newcomer Google Inc.
The deal, the first major alliance between two of the Web's main providers of instant messaging, will allow users of Microsoft's MSN Messenger service and Yahoo Messenger to swap instantaneous text messages and also make voice calls to each other.
Up to now, such interoperability has been restricted to users within each service.
"This is truly a turning point for the IM (instant messaging) industry," Yahoo Chief Executive Terry Semel (search) said in a statement.
The companies said they expect to have their services linked together by June 2006. Yahoo has about 95 million users and MSN counts about 180 million instant messaging users.
"I think this is another step in the direction toward broader interoperability," said Radicati analyst Matt Anderson.
AOL, a unit of Time Warner Inc. (TWX), is currently the market leader in the instant messaging space with a share of 56 percent, according to research firm Radicati Group.
But with Microsoft and Yahoo making up most of the rest of the market, their combined service could pose a formidable challenge to AOL's market position. Google launched its own instant messenger, which includes Internet voice calling, in August.
At stake is the ability to attract users and offer them other services and information from the Web portals, which in turn helps Microsoft's MSN Internet unit, Yahoo and AOL earn advertising dollars.
Blake Irving, vice president in charge of communication services at Microsoft's MSN unit, said the ability to send messages between different networks was the "most requested feature from our users."
"The most important thing is to make this safe, secure and private," he said.
The technology behind the deal already exists.
Microsoft has already opened up its corporate online messaging service, which requires a license and offers more features, to AOL and Yahoo. Unlike free messaging services, corporate messaging lets businesses install instant messaging within corporate networks, where conversations can be monitored and saved, much like enterprise e-mail.
Yahoo shares closed in Nasdaq trade down 17 cents, or 0.5 percent, at $33.93, while Microsoft was was down 11 cents at $24.30.