BSkyB is to buy O2’s home telephony services from Telefonica, becoming the second biggest broadband provider in the UK in the process.
The deal will see Sky overtake Virgin Media in user figures and close the gap on the number one provider, BT.
The deal does not include the mobile phone operations of O2, which has more than 23 million customers in the UK. O2 said the deal would enable it's mobile business to focus on the roll-out of next generation 4G services.
The satellite broadcaster, which is the parent company of Sky News, will pay O2 owner Telefonica £180m for the O2 and BE consumer broadband and home phone businesses. Up to another £20m will be aid once the customers have been switched to Sky.
The deal is due to complete by the end of April, subject to regulatory approval.
Around 3.6 million BSkyB customers currently take the trio of services - TV, broadband and home telephony.
The company said the acquisition will provide advantages of scale for its home communications business.
BSkyB chief executive Jeremy Darroch said: "From a standing start in 2006, we have added more than 4.2 million broadband customers. The acquisition of Telefonica's UK consumer broadband and fixed-line telephony business will help us accelerate this growth."
The company said O2 and BE's broadband customers will be switched to its all-fibre network and that it might also pay up to £20m to Telefonica UK for the successful completion of the migration process.
Mobile phone business O2, which has more than 23 million customers in the UK, is expected to subsequently focus on the roll-out of next generation 4G services.
Telefonica UK chief executive Ronan Dunne added: "We believe this agreement is the best way of helping our customers get the highest quality home broadband experience from a leading organisation in the market."
The news comes as official figures show that some 33 million adults in Britain logged on daily to the internet in 2012.
The Office for National Statistics said the number has more than doubled since 2006, when 16 million Britons used daily web services.
Biggest UK ISPs by subscribers
1. BT retail 6,569,000
2. Virgin Media 4,465,000
3. Sky Broadband 4,235,000
4. TalkTalk 4,053,000
5. EE 693,000
6. O2 560,100
Source: ISP Review