Internet search giant Google is to acquire the hit video-sharing website YouTube for $1.65bn (£883m) in shares.

Google CEO Eric Schmidt confirmed the deal, saying that the two companies were “natural partners to offer a compelling media entertainment service to users, content owners and advertisers."

YouTube was set up in February 2005 by PayPal employees Chad Hurley, Steve Chen and Jawed Karim. Under the terms of the acquisition, all current YouTube employees, including Hurley and Chen, will stay with the company, and the brand will remain separate from Google.

YouTube will be Google's most expensive acquisition to date, but analysts have defended the high price tag, pointing out that it reflects the growing shift to online video content among both consumers and advertisers. 

Google and YouTube have also separately announced new distribution deals. YouTube will show news, sport and entertainment video content from CBS, while Google has signed an agreement with Sony BMG and Warner Music for the rights to music videos.