The agreement should improve Java support on Internet Explorer and will see Microsoft pay Sun £490m to resolve anti-trust issues and £380m for patent issues.
Sun and Microsoft will make their rival web services architectures (Java 2.0 Enterprise Edition and .net) interoperable.
Microsoft had severely restricted Java support as a result of its legal dispute with Sun and had introduced C# as a rival language to Java. The agreement should give users some reassurance that Microsoft's Java virtual machine will continue to be supported.
Scott McNealy, chairman and chief executive at Sun Microsystems, said, "[The agreement] will stimulate new products for customers who want to combine server products from multiple suppliers and achieve seamless computing in a heterogeneous computing environment."
Steve Ballmer, chief executive officer at Microsoft, said, "The real winners are the customers and developers who rely on our products and innovations."
Bola Rotiba, senior analyst at Ovum, welcomed the news and said, "Anything that supports greater interoperability is good."
The two companies said they would also provide access to their respective server-based technologies. Sun and Microsoft are expected to collaborate on Windows Server and Client support.
The companies are committed to developing interoperable identity management products for Active Directory and Sun Java System Identity Server.
Sun also said it would join Microsoft's Communications Protocol Program and has obtained Windows certification for its Xeon servers.