Overture specializes in so-called sponsored search, where businesses pay to have their Web sites listed at the top of search results.
Yahoo will now also be able to sell other kinds of advertising to the 88,000 companies that buy Overture's sponsored search ads.
"The combined assets position Yahoo as the largest global player in the rapidly growing Internet advertising sector," said Terry Semel, chairman and chief executive officer of Yahoo.
Overture was started by Internet investor Bill Gross in 1998 as GoTo.com. It became profitable in 2001, although it has lost some contracts to Google recently and reduced its 2003 profit forecast earlier this year.
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Overture pioneered a pay-for-placement search engine, whereby advertisers bid for the right to have their links displayed under specific search terms. The auction determines the order which the links are displayed on a Web page.
The acquisition "makes terrific sense for Yahoo,'' said Semel. "It makes us the largest, most integrated advertising company on the Internet on a global basis.''
The Overture deal comes after Yahoo purchased search technology company Inktomi in December, a move that signalled it was serious about building up its search business.
Stock prices in the tech sector have been soaring recently after spending the past few years in the doldrums following the bursting of the dotcom bubble.