SEATTLE (Reuters) - Microsoft Corp (MSFT.O: Quote, Profile, Research) struck a deal with the world's largest personal computer maker, Hewlett-Packard Co (HPQ.N: Quote, Profile, Research), to place a toolbar on new PCs that leads to its Live Search engine, the companies said on Monday.

The deal is Microsoft's latest attempt to chip away at the dominance of search leader Google Inc (GOOG.O: Quote, Profile, Research). The agreement, which takes effect next January for new PCs in the United States and Canada, displaces a similar one HP has with Yahoo Inc (YHOO.O: Quote, Profile, Research).

Under the agreement, Microsoft's search engine will also be the default service on the Internet Explorer browser preloaded on new HP computers.

Microsoft did not disclose the terms of the agreement.

"This is the most significant distribution deal for Live Search that Microsoft has ever done," said Kevin Johnson, president of Microsoft's platform and services division.

Number-two PC maker Dell Inc (DELL.O: Quote, Profile, Research) and Google have an agreement to preinstall Web and desktop search software on Dell's consumer computers. It expires in 2009.

A Dell spokesman said the company has not decided if it will continue with Google after the current deal expires, but said it was "open to alternative" partnerships.

Google continues to extend its lead in Web search. Research firm comScore said Google's U.S. Web search market share rose to a record 61.5 percent in April, while Yahoo's share declined to 20.4 percent and Microsoft's slipped to 9.1 percent.

Redmond, Washington-based Microsoft has stepped up its efforts to catch Google with a number of initiatives. Last month, it announced a new "cashback" rewards program to encourage people to use its search engine to shop for items.

In February, it made an offer to buy Yahoo that was rejected by the Web company's board. Microsoft shelved its offer over disagreement on price, but restarted talks with Yahoo last month to buy its search service, said a source familiar with the matter.

Shares of Microsoft were down 63 cents, or 2.2 percent, to $27.69, while HP was down 2 percent at $46.12.

(Reporting by Daisuke Wakabayashi; Editing by Braden Reddall)

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