SAN FRANCISCO (Reuters) - International Business Machines Corp. IBM.N and Advanced Micro Devices Inc. AMD.N on Wednesday said they would jointly develop next-generation microprocessor technologies in a bid to keep pace with market leader Intel Corp.INTC.O

The details of the agreement, which extends a technology-sharing arrangement the two companies have had for the past several years, were not released.

But the alliance will run for three years with the option of an extension, said Bill Siegle, chief scientist and senior vice president of AMD's technology operations.

The companies will work to develop technology to make extremely small transistors -- the on-off switches in microprocessors -- that can be packed into faster and more efficient chips and manufactured more cheaply.

Specifically, AMD and IBM said they would target widths of 65 nanometers and 45 nanometers, roughly a measure of the space between transistors on the chip.

By comparison, AMD 90-nanometer products are slated for release in the first half of next year. Intel is expected to release a version of its Pentium 4 processor built on 90-nanometer technology in the second half of this year.

At the same time, AMD and IBM will work toward building chips on 300 millimeter silicon wafers, a larger size than AMD currently uses and a step that promises cost savings.

Both IBM and Intel already have production plants that use 300 millimeter wafers compared with the 200 millimeter wafers used by AMD's main fabrication plant.

The partnership with IBM is key for AMD, since it allows the company to better compete against Intel, said Nathan Brookwood, an analyst at Insight 64.

'VIRTUAL GORILLA' STRATEGY

AMD lacks Intel's cash to spend on research and development, and therefore might not be able to get new products out as quickly without a partner, Brookwood said.

"AMD has referred to this in the past as their 'virtual gorilla' strategy," he added.

"Through partnerships, AMD can match the capabilities and technologies Intel can handle completely on its own," Brookwood said. "AMD has been successful over the past few years in being able to pull these rabbits out of its hat in order to keep up with Intel."

AMD's Siegle said the deal will help the company meet its goals of bringing "break-even costs and spending levels down to levels of profitability."

Chip companies are currently moving from 130 nanometer technology to 90 nanometer process technologies, with one nanometer at a billionth of a meter. Process technology is effectively the roadmap used to manufacture chips.

Shrinking the size of the transistors allows chipmakers to pack more function into smaller chips. They are simultaneously increasing the size of the wafers chips are built on, enabling them to lower the cost of each microprocessor, which serves as the brains of computers and electronics.

IBM and AMD said they expect first products based on the new 65-nanometer technologies to appear in 2005. They said they will use the technologies in their own chip fabrication facilities and in conjunction with other manufacturing partners.

As part of the development work, Sunnyvale, California-based AMD will send a group of engineers to IBM's Semiconductor Research and Development Center, a new plant in East Fishkill, New York, AMD's Siegle said.

In November, IBM said it would jointly develop chip technology and share manufacturing facilities with Chartered Semiconductor Manufacturing CHRT.O of Singapore.