AOL shareholders should be glad abt this news.

The deal shows that Google is willing to pay to preserve its lucrative relationship with AOL and prevent Microsoft from becoming a bigger provider of Internet search tools. A deal between Microsoft and AOL would have made Microsoft’s own advertising network more attractive.

The struggle over AOL reflects the larger competitive landscape between rivals Google and Microsoft, said Internet analyst Scott Kessler of Standard and Poor’s.

The proposed agreement with Google gives AOL more flexibility to sell Google search ads, and have them appear only on AOL sites. The online service currently directs advertisers to Google’s Web site with no way to limit display ads to its own customers.

AOL is Google’s biggest customer, accounting for about $420 million, or about 10 percent, of Google’s revenue during the first nine months of this year, according to regulatory filings.

Most of the $420 million came from the ads Google distributes on AOL’s Web site. The two companies first began working together in 2002 when Google wrestled away AOL from another online advertising network currently owned by Yahoo Inc.

Microsoft, which increasingly views Google as a fierce rival, has been negotiating with Time Warner since January but did not propose any cash investment in AOL, officials said.

*update*

Google has bought 5% of AOL for one billion dollars, preventing Microsoft from making a big move into the search engine market.