Time Warner is hiving off AOL's internet access service from its faster-growing online business as the tremors from Microsoft's $42.2bn bid for Yahoo! continue to shake up the market.
A Microsoft-Yahoo! deal could leave AOL, in which Time Warner owns an 84% stake, facing stiffer competition.
Time Warner has repeatedly expressed a desire to spin off or separate AOL, but Microsoft's recent offer for Yahoo! has given the plan fresh impetus.
The company is also under pressure from Wall Street to tidy up its sprawling structure, amid a disappointing set of full-year results.
Yesterday, Time Warner's full-year profits fell by 33% to $4.38bn (£2.22bn) despite strong movie and DVD releases such as 'Harry Potter and the Order of the Phoenix', 'Ocean's Thirteen' and '300'. Its shares rose 4.7% in anticipation of the shake up.
Jeff Bewkes, Time Warner's chief executive, described the split as "one of our top priorities", adding: "This should significantly increase AOL's strategic options for each of these businesses."
He added that he was splitting AOL's internet access business for consumers away from its advertising operations so they can be run separately.
AOL last year sold off its European internet access operations, with the UK division going to Carphone Warehouse.
It has been suggested in the past that either Microsoft or Yahoo! could buy AOL, but if the two are combined, two potential suitors will be removed.
Another potential suitor, IAC, owner of the search engine Ask.com, last week said that it had been interested in AOL in the past, but that a deal no longer made sense.
Time Warner's move is not the first in the wake of Microsoft's bid for Yahoo!, with reports suggesting that Google is exploring the prospect of a business tie-up with Yahoo!.
A Google-Yahoo! combination would see Yahoo! hand over its search engine business to Google, but allow Yahoo! to remain independent and Google to nullify Microsoft's threat to its status as the market leader in search.
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