Intel, the computer-chip giant accused of abusing its market power, will pay Advanced Micro Devices (AMD), $1.25 billion (£755 million) to settle all long-standing disputes over competitive and licensing issues.

Intel, which makes 80 per cent of the central processing units at the heart of all personal computers, was accused in 2005 by AMD, its smaller rival, of offering financial incentives to computer makers and retailers to buy its microprocessors.

Under the terms of the settlement, AMD said that the two companies will have a new five-year cross license agreement, as well as the one-off settlement pay-out. They will give up any claims of breach from the previous license agreement and drop all pending litigation including the case in U.S. District Court in Delaware and two cases pending in Japan.

In a joint statement the two companies said: "While the relationship between the two companies has been difficult in the past, this agreement ends the legal disputes and enables the companies to focus all of our efforts on product innovation and development."

AMD lost market share to Intel between 2001 and 2004 — a time when, some experts said, AMD’s microprocessors had established a technological lead over Intel.

Intel has come under criticism from European and American regulators since the 2005 allegations. Earlier this year, the European Commission fined the group $1.45 billion, alleging illegal rebates to PC makers such as Dell and Hewlett-Packard.

The New York Attorney General Andrew Cuomo also filed a federal lawsuit against Intel earlier this month accusing it of paying computer makers rebates to illegally maintain its monopoly power and preventing AMD from gaining business with PC makers.

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