Microsoft is buying Internet phone company Skype for $8.5 billion.

The cash acquisition, announced Tuesday morning, will give Microsoft a significant consumer brand online, access to 170 million people who use Skype for free or cheap calls, and Skype's phone and video calling software, which runs on the Web and Internet-connected devices.

Microsoft said the acquisition will expand its product offerings, including unified communication software Lync, email software Outlook, instant messaging software Messenger, free Web email Hotmail and online video game network Xbox Live.

The acquisition is the largest in Microsoft's history and signals a more aggressive business approach from Microsoft as it expands into cloud computing and tries to get some traction with mobile phones and tablets.

Microsoft said Skype will run on its fledgling mobile operating system Windows Phone, Xbox, Kinect and other "Windows devices," without being more specific. Microsoft is expected to show a new version of Windows that will run on tablets this fall.

Skype, based in Luxembourg, is privately owned by an investor group led by Silver Lake. The company was started in 2003, and the service has become popular for its free or low-cost local and international voice and video calls. The service runs over the Internet instead of traditional landlines or cellular networks. It uses a technology called voice over Internet Protocol, also known as VoIP.

EBay bought Skype in 2005, then sold it to Silver Lake group in November 2009 for about $2 billion. The investment group includes eBay, CPP International Group, Joltid Limited in partnership with Europlay Capital Advisors and Andreessen Horowitz.

"Skype is a phenomenal service that is loved by millions of people around the world," Microsoft Chief Executive Steve Ballmer said in a statement. "Together we will create the future of real-time communications so people can easily stay connected to family, friends, clients and colleagues anywhere in the world."

Skype will become a new business division in Microsoft. Tony Bates, Skype CEO, will become a division president and report directly to Ballmer.

Before the Skype announcement, Microsoft's largest acquisition was the $6 billion purchase of online advertising firm aQuantive in 2007. Microsoft offered $45 billion to buy Yahoo in 2008, but the talks fell apart and the two companies now have a search partnership.

Here is a link to Tuesday's news statement from both companies.

The companies will hold a webcast news conference at 8 a.m.