With like-for-like sales falling at Morrisons, the pressure is on the supermarket chain to enter the online market.
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Ocado shares jumped more than 40% following the announcement, while Morrisons was up by 1% in the FTSE 100 Index.
Ocado chief executive Tim Steiner said the agreement with Morrisons would have no impact on its existing arrangements.
We will continue to source products under our long-term agreement with Waitrose, and our customers will continue to benefit from the existing high levels of service, wide range of products and competitive prices that they currently enjoy.
The launch will see the retailer use Ocado's recently opened distribution centre in Warwickshire for deliveries through a Morrisons-liveried fleet.
The 25-year deal involves Morrisons paying up to £170 million to Ocado to acquire the site and equipment.
– Morrisons chief executive Dalton Philips
This agreement is a significant strategic step for Morrisons.
From a standing start, Morrisons will be competing in the fast-growing online channel by the end of this year with a really compelling proposition.
The customer gets our affordable fresh food delivered by Ocado's state-of-the-art distribution system.
Supermarket Morrisons is to start its online groceries business by the end of this year after unveiling a tie-up with delivery firm Ocado.
Ocado is closely linked with Waitrose, exclusively delivering the supermarket's products - as well as its own and those of branded ranges - to its customers and the move is likely to spark a backlash.
Mark Price, managing director of Waitrose, recently told The Sunday Telegraph its lawyers would seek to examine any tie-up between the other two companies.
Dalton Philips, Morrisons CEO has said that the supermarket's late entry to the online market will prove to be an advantage.
Mr Philips told ITV News, "There are often 'last mover' advantages because you can learn where others have made mistakes.
"It's a market that's growing really quickly, we've been doing it for about two years in a smaller way...so we've been learning a lot in the last 24 months - now it's time to accelerate."
Morrisons are currently in talks with Ocado over possible online offerings.
Morrisons CEO Dalton Philips has urged the government to cut fuel duty to help struggling customers.
He told ITV News that, "I think that's what hits the customers most at the moment, there are a number of other areas, but if they could work on lower fuel duty that would make a big difference to consumers."
Morrisons boss Dalton Philips has called on the government to cut fuel duty and says that it is the biggest thing they could do to help customers having difficult times.
He also tells us that customers will be able to shop online by end of the year, but Ocado tie up just one option, although he is cryptic about other possibilities if the Ocado deal does not come off - but optimistic on 100 new convenience stores.
Morrisons has admitted that its performance fell short of expectations after reporting a 7% drop in full-year profits to £879 million.
The supermarket, which generated sales of £18.1 billion in the year, said it had not done enough to communicate its promotions and suffered because it still lacked a meaningful presence in the two fastest growing sectors of the market.
The UK's fourth-biggest grocer, which employs 129,000 staff at 498 stores, said like-for-like sales dropped 2.1% in the year, while the average of 11.4 million customers in its stores each week was down on the prior year.