Ericsson's decision to team up with Microsoft, in order to develop Internet web browser and e-mail access from mobile phones and handheld computers, reflects the importance of the emerging mobile Internet market.

Ericsson, whose share climbed 12 per cent on the news on Wednesday, said the alliance would ultimately boost demand for mobile Internet services by helping to create new software applications.

"This will lead to higher demand for communications between the Internet and mobile devices, and to higher demand for communication between mobiles and office. That should give us more sales of infrastructure and handsets," the Swedish company said.

However, the deal also highlights Microsoft's determination to play a central role in the evolution of a new market, which could be dominated by rivals including digital phone manufacturers, network operators and software suppliers such as Symbian. The wireless Internet market, based on digital mobile telephones, hand-held PCs and digital communicators, is set to explode over the next few years and could even outpace fixed-Internet growth.

According to the latest estimates, there are about 160 million fixed-Internet connections worldwide compared with 375 million mobile phone users, many in Europe where GSM digital networks and mobile phone manufacturers such as Nokia and Ericsson have led the digital wireless revolution.

By 2003 the number of digital mobile phone users is projected to jump 535 million, creating an enormous potential base of mobile Internet and e-commerce users. "Europe is the cradle of the wireless Internet," says Mr Victor Basta, managing director of Broadview, the London-based IT mergers and acquisition specialist.

Industry analysts predict that more than 10 per cent of e-commerce will be conducted through mobile handsets within three years, and that in excess of 600 million Internet-enabled mobile phones will ship between 2002 and 2005, leading to what Mr Basta has dubbed "the birth of m-commerce".

As Wednesday's announcement demonstrates, Microsoft, which already dominates the desktop software and Internet browser markets, does not want to be left out. Mr Bill Gates, Microsoft chairman, made clear earlier this year in Geneva that Microsoft wanted to play a significant role in the mobile Internet.

Microsoft recently announced a mobile Internet deal with British Telecom and earlier this year acquired SendIT, a mobile e-mail software developer based in Sweden.

However, unusually for the US software group, in the mobile Internet market Microsoft is having to play catch-up. Windows CE, Microsoft's "lightweight" operating system, has been at best a limited success in the hand-held computer market, where it has been outpaced by its rivals.

These include 3Com's Palm operating system and the EPOC operating system developed by Psion, the UK-based hand-held computer group, which it folded into the Symbian joint venture with Nokia, Ericsson, Motorola and Matsushita.

However, the architecture of the mobile Internet market is still being defined, and as initial market reaction to Wednesday's announcement showed, there is confusion about which companies will dominate.

Psion's shares initially fell sharply after the announcement, reflecting fears that the agreement could pose a threat to Symbian.

The shares recovered, however, after Ericsson dismissed suggestions it would drop the EPOC operating system. Mr Jan Ahrenbring, Ericsson's vice-president of marketing, emphasised that Ericsson had not walked away from the Symbian project.

"This should be viewed as developing layers. Smybian and EPOC are two layers; this alliance with Microsoft provides us with another. They are not mutually exclusive and can run together. We will continue with the Smybian project," he said.

In fact, after initial surprise, the announcement was viewed by some analysts as indicating that Microsoft had tacitly acknowledged that Windows CE was unlikely to win the mobile Internet operating system battle, and had decided instead to focus on the server end of the market and on the software application segment.

The mobile phone microbrowser market is dominated by Phone.com, a US-based start-up. However, Microsoft's decision to develop a rival microbrowser could signal a rerun of the desktop web browser "wars" that eventually saw Microsoft triumph over Netscape.