Sun Microsystems' core business is still making losses

Under the peace deal, Microsoft will pay Sun $1.6bn to resolve their patent and competition disputes.

Sun had accused Microsoft of changing its popular Java programming software without its permission.

In a separate development, Sun announced that it was shedding 3,000 jobs in order to cut costs, and warned losses would be above expectations.

It now expects losses of between $750m and $810m for the three months to the end of March.

'New relationship'

Under the Microsoft deal Sun will receive $700m to resolve pending antitrust issues and $900m to end patent disputes.

"This agreement launches a new relationship between Sun and Microsoft -- a significant step forward that allows for cooperation while preserving customer choice," said Scott McNealy, chairman and chief executive officer of Sun Microsystems, in a statement with Microsoft.

Mr McNealy said the future cooperation would "stimulate new products" and deliver "great new choices for customers".

Microsoft chief executive Steve Ballmer added that while the two companies would continue to compete hard, "this agreement creates a new basis for cooperation that will benefit the customers of both companies".

The 3,000 job cutbacks at Sun - 10% of its workforce - will be combined with selling off some of its global property portfolio as part of its restructuring.

The downturn in the technology sector following the bursting of the dotcom bubble has hit Sun Microsystems hard over the past few years.

Work continuing

The company had aimed to return to profitability by the end of June 2002 but it is still making a loss two years later.

However, Mr McNealy insisted on Friday that there had been substantial progress in three years of cost reduction.

Sun shares are currently trading at about $4, but hit a peak of $64 in 2000.