US software giant Microsoft is in late stage negotiations to buy internet phone service provider Skype in a deal that could be worth 8.5bn dollars, the Wall Street Journal reported on Tuesday.

Confirmation of the deal is expected later on Tuesday but sources warned the deal may still fall apart. Microsoft and Skype declined to comment.

The $8.5bn Skype deal would be the largest acquisition in the 36-year history of Microsoft. In 2007, Microsoft paid around $6bn for online advertising firm aQuantive, which until now was it's biggest deal.

Skype is said to have an estimated 663 million users of its Internet telephony and video calling worldwide. It was founded in 2003 by the creators of file sharing technology Kazaa, Niklas Zennstrom and Janus Friis. In 2005, the company was sold to eBay for $2.6bn in cash and stock.