Time Warner subsidiary AOL said yesterday that it would acquire the third-largest online social network Bebo, which ranks behind MySpace and Facebook for $850 million.

AOL sees the acquisition as a potential expansion of  its online advertising business as well as reach out to Bebo's predominantly younger audience.

Bebo is a rapidly growing social networking site, which claims more than 40 million users. It is the most popular social network in the United Kingdom with an estimated 11 million users, mainly teenagers use it to communicate and keep up with their friends.

"This is a tremendous acquisition and one I think is game-changing for AOL," said the company's chairman and chief executive, Randy Falco. "Bebo will be the cornerstone of our strategy."

The all-cash deal comes during a period when major media and technology firms are looking to expand into social networking, a market that could draw an estimated $1.6 billion in advertising in the United States in 2008, according to research firm eMarketer.

Despite plans to entice online advertisers with Bebo's young audience, it remains unclear whether AOL or its other rivals can leverage a social network's members to pay back such high investments. eMarketer expects advertising on social networking sites worldwide to increase from $2.15 billion this year to $2.89 billion in 2009.

Rupert Murdoch's News Corporation acquired the biggest social network, MySpace, in 2005. The site has about 110 million users worldwide.

Microsoft paid $240 million for 1.6 per cent of Facebook in October 2006, the second largest social network, which has more than 60 million users worldwide.

With the Internet thronged with social websites and so-called Web 2.0 companies, Bebo made its mark by forming partnerships with established media such as the BBC and MTV as well as running pioneering Internet shows such as online drama Kate Modern.

Bebo had 4.8 million users in the United States in February and about 60 per cent of Bebo's traffic in January came from Europe, according to a report published by Internet marketing research company ComScore. In comparison, 32.4 million people used Facebook and 68 million people used MySpace in February, the report added.

Michael Birch and his wife Xochi Birch founded Bebo in 2005. Although the company is headquartered in San Francisco, it is run largely from offices in London and has about 100 staff in the US and Britain.