Set to launch in the fall, the agreement will let users conduct Web searches from within Facebook and will also include Microsoft's paid search advertising, Microsoft CEO Steve Ballmer said in a keynote speech at Microsoft's annual financial analyst meeting.

"We will be providing an API to Facebook where they will create a rich search experience, including a Web search for the Facebook users," Ballmer told analysts. "So we're excited about even using that as an opportunity to further extend the Live Search reach."

Facebook and Microsoft first hooked up in 2006 when the two firms announced a strategic partnership that made Microsoft the sole provider of banner ads on Facebook's U.S. site, a deal that's slated to run until 2011. In October, Microsoft acquired a 1.6 percent stake in Facebook for $240 million, in a deal that pegged Facebook's valuation at a staggering $15 billion.

Microsoft, a distant third to Google and Yahoo in search, has been getting creative in its quest to gain search market share and compete more effectively with its more established foes.

In May, Microsoft announced Live Search Cashback, a program in which users receive ad-funded rebates each time they buy a product from one of the software giant's 700+ merchant partners, a list that includes eBay, Barnes & Noble.com, Overstock.com, Sears, and Zappos.com.

Of course, Microsoft would love to buy Yahoo and has been attempting to acquire search player No. 2 for months, but Microsoft executives at the financial analysts meeting indicated that a deal involving Microsoft buying the entire company is extremely unlikely at this point.