Yahoo has shunned a deal that would have formed a web-ad partnership with Microsoft and has instead opted to partner with Google.
The agreement enables Yahoo to run ads supplied by Google alongside Yahoo search results and on some of its web properties in the US and Canada.
The agreement is non-exclusive, giving Yahoo the ability to display paid search results from Google, other third parties, and Yahoo's own Panama marketplace.
Yahoo will define its users' experience and will determine the number and placement of the results provided by Google and the mix of paid results provided by Panama, Google or other providers.
The agreement applies to paid search and content match and does not apply to algorithmic search. The agreement also applies to current partners in Yahoo's publisher network.
Yahoo CEO and co-founder Jerry Yang said, "We believe that the convergence of search and display is the next major development in the evolution of the rapidly changing online advertising industry.
"Our strategies are specifically designed to capitalise on this convergence, and this agreement helps us move them forward in a significant way. It also represents an important next step in our open strategy, building on the progress we have already made in advancing a more open marketplace."
Yahoo said the agreement will enable the company to better monetise its search inventory in the US and Canada. At current monetisation rates, this is approximately an £400m annual revenue opportunity, it said.
In the first 12 months following implementation, Yahoo expects the agreement to generate an estimated £125m to £225m in incremental operating cash flow.
Microsoft meanwhile, said any potential deal with Yahoo still was not dead, even though Yang, apeing Microsoft CEO Steve Ballmer, said his firm had "moved on".
When Microsoft had its proposed takeover of Yahoo knocked back, Ballmer said Redmond had now "moved on" and would not return with a higher bid.
It did return to propose a partnership though, but has now been pipped by Google.