SAN FRANCISCO (Reuters) - Microsoft Corp <MSFT.O> will announce plans to expand its relationship with online social network Facebook to provide web search and search advertising, a source familiar with the matter said on Thursday.

The expanded deal follows Microsoft's decision not pursue a takeover of Yahoo Inc <YHOO.O> to bolster its online search and advertising business as it tries to compete with Internet leader Google Inc <GOOG.O>.

Microsoft bought a 1.6 percent stake in fast-growing Facebook for $240 million in October, beating out Google in the investment. At the time, it reached an exclusive deal to sell ads on Facebook outside of the United States.

(Reporting by Eric Auchard, editing by Leslie Gevirtz)