Nokia and Microsoft teamed up on Friday to build an iPhone killer in a desperate attempt to take on Google and Apple in the fast-growing smartphone market.
Shares in the world's largest cellphone maker fell sharply on uncertainty about the financial impact of Nokia's new chief executive Stephen Elop's strategic u-turn which will use Microsoft's Windows Phone software in its smartphones.
"It is now a three-horse race," said Elop, who was drafted in from Microsoft last September to turn Nokia around.
The deal marks a major breakthrough for Microsoft which after years of struggling to establish itself in wireless will get its software into upwards of 30 million smartphones sold by Nokia every quarter.
"To have the largest phone manufacturer in the world... it's fantastic, it's truly fantastic," Andy Lees, head of Microsoft's mobile business told Reuters in an interview.
Nokia plans to use Microsoft's Bing search engine across its cellphones, opening up a huge market for Microsoft as it seeks to challenge Google as the world's leading search engine.
The partnership will mean thousands of job cuts at Nokia around the world, with a dramatic reduction in research and development spending.
Investors were unconvinced by Elop's new strategy and Nokia shares tumbled 10 percent after it said 2011 and 2012 would be "transition years", fuelling fears of a margin hit.
Nokia said its operating margin in the phone business would be "10 percent or more" after the transition period. Analysts had expected margins to rise to 11.4 percent in 2012.