Sun Microsystems yesterday reached a $1.6bn (£870m) settlement of its legal disputes with Microsoft and announced plans to cut another 3,300 jobs, reflecting the company's continued woes.

The announcements were accompanied by a warning from the computer server and software maker that its losses in the third quarter would be worse than anticipated. The struggling company has reported 11 straight quarters of declining revenues.

Sun described the deal with Microsoft as a "broad cooperation agreement". Microsoft will pay Sun $700m to resolve competition issues that arose from the government's anti-trust investigations and will also pay an additional $900m to resolve patent issues.

Sun had been fighting Microsoft for years, alleging it had tried to sabotage its Java software. It sued Microsoft for $1bn in August 2002.

"It's a huge step forward," said Sun chairman and chief executive Scott McNealy. "Everywhere we go our customers say, 'we have both Sun technology and Microsoft technology - we need peace'."

In addition, Sun and Microsoft have agreed to pay royalties for the use of each other's technology.

For Microsoft, the settlement is further hurdle cleared in its attempt to clear up the mass of legal actions it has faced in recent years. The company has reached similar co-operation agreements in the settlement of disputes with the likes of Time Warner.

"Our companies will continue to compete hard, but this agreement creates a new basis for cooperation that will benefit the customers of both companies," said Steve Ballmer, the chief executive of Microsoft.

The job cuts are the latest in a series designed to return Sun to profitability. Mr McNealy had initially been reluctant to cut jobs in the wake of the dotcom crash because of the difficulty in replacing talent once the economy recovers. But at the end of 2001, he bowed to the pressures on the business and cut 3,900 jobs.

About 18 months ago, the company shed a further 4,400 employees. The job cuts announced yesterday amount to about 9% of the remaining workforce.

The Microsoft settlement and the attempt to gain a grip on costs appeared to outweigh the latest profit warning. Shares in the company were trading 10% higher at $4.61 in early trade.

Sun said it expects a loss for the third quarter of up to $810m on revenues of $2.65bn.