Microsoft Corp is close to buying web video conferencing service Skype Technologies for $8.5 billion including debt, a source familiar with the situation said, in a deal which would rank as the biggest for the software company.

A deal is expected to be announced as early as Tuesday morning, the source said. The source declined to be named because the talks are not public.

Microsoft and Skype declined comment.

Skype, which had delayed plans for an initial public offering, had recently been looking at other options.

Facebook and Google Inc were separately considering a tie-up with Skype, two sources with direct knowledge of the discussions previously told Reuters. Google had held early talks for a joint venture with Skype, the second source said.

A source said at the time such a deal could value Skype at $3 billion to $4 billion -- less than the value put on it by Microsoft's interest.

Skype's planned IPO had been expected to raise about $1 billion, several other sources said at the time.

Skype was formed in 2003. Ebay Inc bought it in 2005 for $3.1 billion.

In 2009, eBay sold a majority stake in Skype to an investor group that included Silver Lake, the Canada Pension Plan Investment Board and Andreessen Horowitz for $1.9 billion in cash and a $125 million note. EBay retained about a third of the company.

Last year, Skype had about 124 million connected users every month by the end of June. But 8.1 million were paying customers, using Skype to make calls to traditional phones at discounted rates.

A deal would be Microsoft's biggest acquisition if it goes ahead, exceeding the $6 billion it paid for online ad agency aQuantive.

Goldman Sachs and JPMorgan are advising Skype, the source said. Microsoft is not using advisers, the source said.

Earlier, the Wall Street Journal reported news of the potential deal.

(Additional reporting and writing by Megan Davies; Additional reporting by Sakthi Prasad in Bangalore; Editing by Anshuman Daga)

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