Intel Corp will pay graphics chip designer Nvidia $1.5 billion to license its technology, settling a legal dispute and smoothing the way for better competition in PC processors.

The agreement was a major victory for Nvidia, sending its shares up 4 after hours in recognition of the value of its high-end graphics technology to Intel.

The deal gives Intel, the world's biggest chipmaker, the right to use Nvidia's technology in its PC chips as graphics processing becomes increasingly important.

Nvidia gets to use some of Intel's technology as it works to build its own PC central processors, using architecture licensed from Britain's ARM Holdings.

Many investors had expected a settlement, but it had been unclear how much Intel might pay Nvidia and the $1 billion payment was not built into the value of Nvidia's stock, said Kevin Cassidy, an analyst at Stifel Nicolaus.

Impressive, it's a big number, said Doug Freedman, an analyst at Gleacher & Company.

The agreement comes as Nvidia tries to carry the momentum of low-energy chips based on ARM architecture -- now ubiquitous in smartphones -- into PCs.

Last week, Nvidia announced it is developing an ARM-based PC central processor under the code name Project Denver and will aim them at everything from workstations to supercomputers, directly challenging Intel.

The agreement announced on Monday does not give Nvidia the right to make central processors using Intel's prized x86 technology.

Those are not our core businesses nor do we have the intention or strategy to go develop those things, Nvidia chief executive Jen-Hsun Huang said in a conference call with analysts.

PARALLEL COMPUTING

Nvidia specializes in processors that are ideal for processing complex graphics and has been promoting them to be used for other complicated mathematical tasks, such as medical imaging and weather forecasting.

While traditional central processors found in PCs are designed to make huge calculations very quickly, one after another, graphics processors, or GPUs, excel at carrying out several small calculations at the same time, which makes them handy for specific kinds of tasks.

Nvidia has been talking about the world needing a parallel processor and it seems Intel is validating their technology, Cassidy said.

Nvidia's shares jumped 4.45 percent after hours after closing up 3.83 percent. Intel's shares were down 0.2 percent after hours.

The legal dispute settled on Monday began when Intel sued Silicon Valley neighbor Nvidia in 2009 and Nvidia counter-sued over licenses for technology used to make chipsets, which are groups of integrated circuits that connect to the microprocessor in a PC.

Intel has been under attack from regulators for years over aggressive pricing and sales tactics in marketing its chips.

Its microprocessors are the brains in 80 percent of the world's personal computers, making compatibility with Intel's architecture key for smaller chip makers.

In August, Intel settled a U.S. Federal Trade Commission complaint accusing it of using its market dominance to unfairly stifle competition.

Since the Santa Clara, California-based companies launched their suits, Nvidia has wound down its chipset business and redeployed its chipset engineers to its mobile unit to take advantage of the tablet and smartphone booms.

Last week, Nvidia's shares surged 29 percent as the company's new Tegra 2 mobile chip impressed investors at the Consumer Electronics Show in Las Vegas.

(Reporting by Noel Randewich and Dan Levine; editing by Andre Grenon)

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