Under the terms of the agreement, Microsoft will pay 3.79 billion euros to purchase all of Nokia's devices and services business and 1.65 billion euros to getting access to Nokia's patents -- a total of 5.44 billion euros in cash, Microsoft said in a statement.
Microsoft will draw upon its overseas cash resources to fund the transaction. The deal is expected to close in the first quarter of 2014, subject to approval by Nokia's shareholders, regulatory clearances and other closing conditions, it added.
The acquisition will also include licence and use of Nokia's mapping services.
In July 2011, Nokia had announced that it would partner Microsoft to use its Windows software for its Lumia range of smartphones.
"It's a bold step into the future a win-win for employees, shareholders and consumers of both companies.
Bringing these great teams together will accelerate Microsoft's share and profits in phones, and strengthen the overall opportunities for both Microsoft and our partners across our entire family of devices and services," Microsoft CEO Steve Ballmer said in a statement.
In addition to their innovation and strength in phones at all price points, Nokia brings proven capability and talent in critical areas such as hardware design, engineering, supply chain, manufacturing management, hardware sales, marketing and distribution, he added.