AOL has confirmed that Google has agreed to invest $1 billion to take a 5% stake in the company, as part of a pact where Google will move beyond text-based advertising to allow AOL to sell graphical ads to Google's fast-growing ad network.

The stake effectively values AOL at $20 billion.

Terms of the deal call for AOL's unit to sell display and banner advertising via Google's network of partner sites.

Roughly half of Google's advertising revenue comes from text ads on its own site, while the other half comes from ads sold through partners such as AOL.

The agreement will also mean that the Google will create a white labelled version of Google's advertising technology enabling AOL to sell search advertising directly to advertisers on AOL-owned properties.

Other parts of the agreement mean that AOL has promised to make content more accessible to Google Web crawlers, collaboration over including AOL's premium video service with Google Video and enabling Google Talk and AIM instant messaging users to communicate with each other.

Google Chief Executive Officer Eric Schmidt said: "Today's agreement leverages technologies from both companies to connect Google users worldwide to a wealth of new content”.

However not everyone is happy with the announcement. In a letter on Monday to Time Warner's board of directors, billionaire investor Carl Icahn called the potential AOL-Google deal "disastrous" because it could rule out future deals AOL might do with Google rivals such as eBay or Microsoft.