The deal will see Nokia use the Windows phone operating system for its smartphones, the company said.
It means that Nokia's existing operating systems will be sidelined.
Speaking at the launch of the partnership, Nokia's chief executive Stephen Elop revealed that there would be "substantial" job losses as a result of the tie-up.
Nokia will remain "first and foremost...a Finnish company. Finland is our home and will remain our home," he said.
But job losses around the world, including in Finland, will be inevitable, he added.
Windows first
Speaking about the new partnership with Microsoft, Mr Elop said that "the game has changed from a battle of devices to a war of ecosystems".
"An ecosystem with Microsoft and Nokia has unrivalled scale around the globe," he said.
Microsoft's chief executive Steve Ballmer was also present at the launch, underlining the importance of the deal to the computing giant.
"Nokia and Microsoft working together can drive innovation that is at the boundary of hardware, software and services," he said.
Microsoft's Bing will power Nokia's search services, while Nokia Maps would be a core part of Microsoft's mapping services.
The new strategy means Nokia's existing smartphone operating systems will be gradually sidelined.
Symbian, which runs on most of the company's current devices will become a "franchise platform", although the company expects to sell approximately 150 million more Symbian devices in future.
"It is a transition from Symbian to Windows phone as our primary smartphone platform," said Mr Elop.
Windows may not be the exclusive operating system for Nokia tablets though.
Stephen Elop and Steve Ballmer Mr Elop was at Microsoft before joining Nokia
"We reserve the right to introduce tablets using other platforms, including ones we may be working on internally," he said.
There was no specific announcement about when the first Windows-powered Nokia phone will be available.
Mr Elop revealed that the firm did consider a tie-up with Google's Android operating system.
"We spent time with our colleagues at Google and explored the Google ecosystem but we felt we would have difficulty differentiating within that ecosystem," he said.
It was also revealed that talks with Microsoft only began in November, illustrating how quickly the deal has been pushed through.
Future clashes
The move away from Symbian is a brave decision for Nokia, according to experts.
"This is a clear admission that Nokia's own-platform strategy has faltered," said Ben Wood, an analyst with research firm CCS: Insight.
"Microsoft is the big winner in this deal, but there are no silver bullets for either company given the strength of iPhone and Google's Android," he added.
Nokia's share of the smartphone market fell from 38% to 28% in 2010, according to monitoring firm IDC.
Nokia's upcoming Meego operating system will also be sidelined.
According to the company statement: "MeeGo will place increased emphasis on longer-term market exploration of next-generation devices."
The MeeGo platform was expected to form the core of Nokia's future smartphone and tablet strategy.
The company says it still plans to ship one Meego device by the end of 2011.
For Magnus Rehle, the Nordic managing director of research firm Greenwich Consulting, Nokia may have difficulty juggling its three operating systems: Windows, Symbian and MeeGo.
"Three platforms is a lot to work with. I'm not sure there is room for so many platforms," he said.
And, as with any tie-up, there could be clashes between the two firms, he said.
Earlier this week Nokia chief executive Stephen Elop sent a memo to staff warning that the company was in crisis.
The memo, published first by technology website Engadget, said that the mobile giant was standing on a "burning platform".
"Elop has to convince the best people to stay and some people will inevitably be jumping off the burning platform," said Mr Rehle.
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