Palm

(PALM)

announced a deal with

Yahoo!

(YHOO)

Tuesday to add some of Yahoo!'s Internet services to its handheld computers, in bid to catch up with a smaller rival,

Handspring

.

Palm will offer users of its Palm III, Palm V, and Palm VII devices

Yahoo! Mail

, an email service, and

Yahoo! Messenger

, a slightly faster method of electronic correspondence. Yahoo! Mail is already available on the Palm VII model.

The terms of the deal were not disclosed. Neither company, which are both based in Santa Clara, Calif., was available for comment early Tuesday.

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In February, Handspring, a company that makes handheld computers based on similar technology as that used in Palm devices, introduced a plug-in card that allows for audio transmission and personal messaging. Handspring's Visor offers a module that converts the handheld computer into a phone, pager and a music player. It poses a challenge to Palm's market dominance.

Handspring was formed in 1998 by the original Palm Pilot inventors, who had left Palm.

"Through our agreement with Palm, we're advancing our

Yahoo! Everywhere

strategy of enabling access to our popular Web-based services and content anywhere, at any time, from any device," Mohan Vishwanath, vice president of Yahoo! Everywhere, said in a statement. Yahoo! Everywhere is Yahoo!'s program to offer its services around the world.

Palm users will be able to access these services at http://messenger.yahoo.com and http://mail.yahoo.com and upload them to their devices over the HotSync attachment.

"The future of handheld computing will be tied very closely to the Internet," Barry Cottle, chief operating officer for Palm, said in a statement.

Shares of Palm dropped 4 3/8, or 8%, to 50 7/8 amid a

Nasdaq

selloff.

Shares of Yahoo! were up 6 1/4, or 4%, to 178 1/4 in early trading.

Palm is controlled by

3Com

(COMS)

, which plans to spin the company off to its shareholders by the beginning of August.