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Shares in chipmaker Arm Holdings rose 2.2% after Microsoft said its new Windows operating system would be able to run on chips designed by Arm.

The chips are usually found in mobile phones and the deal is significant as previously Windows has been connected with Intel-designed chips.

Arm shares had initially jumped 12.6% in early trading to 531p.

"While expected, we view this as a very positive [deal] long-term for Arm," UBS analysts said in a note.

Microsoft will continue to use chip designs from Intel for other Windows-based products.

Microsoft chief executive Steve Ballmer made the announcement during his keynote speech that opened the Consumer Electronics Show (CES) in Las Vegas.

Arm chief executive Warren East said the announcement marked a "significant milestone" for the company.

Windows combined with Arm technology would "enable innovative platforms to realise the future of computing, ultimately creating new market opportunities and delivering compelling products to consumers", he said.

Microsoft's mobile version of Windows already runs on Arm-designed chips.

About 80% of all mobiles, including Apple's iPhone 4, are built around chips made from Arm designs.

Arm, which was founded in 1990 and employs 1,700 people, has its headquarters in Cambridge in the UK, but also has operations in France, India, Sweden and the US.

The importance of the deal is "hard to overstate", according to Gareth Evans, analyst at brokers Investec.

"The confirmation shows a determination on the part of Microsoft to compete seriously with Apple and Google Android-based devices in the tablet and portable device market," he said.

"The new technology will eventually apply to a group of products, not just tablets, although it will realistically be two to three years before Arm-based products will be released."