Google is close to sealing a significant victory in its escalating battle with Microsoft after reaching an unofficial agreement to ally itself more closely with AOL, including paying $1bn for a 5 per cent stake in the Time Warner internet services division.

The alliance, which includes the broadening of an existing advertising relationship with AOL, could also reinforce the position of Dick Parsons, Time Warner's chairman, who has been under pressure to prove that he can squeeze more value out of the group's sprawling media holdings.