The two companies are teaming up to create a subsidiary for Barnes & Noble's e-book and college textbook businesses, with Microsoft paying $300 million for a minority stake.
Shares of Barnes & Noble jumped $10.41, or 76 percent, to $24.09 in morning trading. The opening price of $26 was a three-year high. Microsoft's stock rose 2 cents to $32.
The deal gives Barnes & Noble ammunition to fend off shareholders who have agitated for a sale of the Nooke-book business or the whole company, but the companies said Monday that they are exploring separating the subsidiary, provisionally dubbed "Newco," entirely from Barnes & Noble. That could mean a stock offering, sale or other deal.
The deal puts to rest concerns that Barnes & Noble doesn't have the capital to compete in the e-book business with market leader Amazon.com Inc. and its Kindle, said analyst David Strasser at Janney Capital.
For Microsoft, the investment means that it will own 17.6 percent in a company that sells tablet computers based on Google Inc.'s Android, one of the main competitors of Windows Phone 7, Microsoft's smartphone software.
Microsoft also said the deal means that there will be a Nook application for Windows 8 tablets, set to be released this fall. The app is likely to get a favored position on Windows 8 screens.
There's already a Nook application for Windows PCs, but none for Windows phones.
William Lynch, the CEO of Barnes & Noble, said Nook software will continue to be available on devices like the iPhone that compete with Windows Phone.
Barnes & Noble has had some success with its e-book sales and the Nook line of e-readers, and is estimated to account for about 25 percent of the U.S. e-book market.
Microsoft has a long-standing interest in the e-book field. It launched e-book software in 2000, but was never able to build a substantial library of books. It's discontinuing the software on Aug. 30.
Barnes & Noble, based in New York, currently runs 691 bookstores in 50 states. The companies said that the subsidiary will have an ongoing relationship with Barnes & Noble's retail stores, but what that relationship will be is unclear.
"The whole reason the Nook business is expanding so rapidly is because bookstores are committed to it and know how to market the product in that environment," said Michael Norris, an analyst at Simba information.
The possibility of a separation of Barnes & Noble's digital and college businesses has been brewing.
In January, Barnes & Noble said it was considering options for its Nook business, including possibly spinning it off or expanding overseas, and said it expected the review to be complete by the end of the year.
And in March, private investment firm G Asset Management, a Barnes & Noble shareholder, offered $460 million for a 51 percent stake in the company's college bookstore unit, Barnes & Noble College Booksellers LLC.
Under that plan, the college bookstore unit was proposed to begin as a private business but become public within a "reasonable" amount of time. G Asset's offer was contingent upon Barnes & Noble keeping current management in place and separating its Nook e-business from the rest of the company. At the time the offer was made, Barnes & Noble declined to comment.
In 2009, Barnes & Noble Inc. bought the college bookstore unit from Chairman Leonard Riggio in a deal worth $596 million. The deal ended up costing Barnes & Noble $460 million after accounting for the unit's cash on hand at the closing date.